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Louisiana Law Review
Volume 48 | Number 1
September 1987
Mass Marketed Software: The Legality of the Form
License Agreement
Deborah Kemp
Repository Citation
Deborah Kemp, Mass Marketed Software: The Legality of the Form License Agreement, 48 La. L. Rev. (1987)
Available at: http://digitalcommons.law.lsu.edu/lalrev/vol48/iss1/7
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MASS MARKETED SOFTWARE: THE LEGALITY OF
THE FORM LICENSE AGREEMENT
Deborah Kemp*
Software for micro or personal computers is commonly mass marketed by mail order, over the counter, or as an optional package available
with the purchase of hardware.' Mass marketed software generally contains an externally visible notice which states that opening the plastic
cover constitutes acceptance of the terms stated thereon. When the
software and hardware are sold as a package, the manufacturer sometimes provides that the software may not be used until a license agreement
is signed and returned.
While each software manufacturer furnishes its own "agreement,"
most mass marketed software licenses exhibit similar characteristics.
Typically, the terms provide that (1) the product is licensed, not sold,
and title remains with the manufacturer; (2) the product may be used
only by the licensee on a single central processing unit (CPU); (3)
copying, modifying, or transferring the program contained on the disk
is restricted or prohibited; and (4) the licensee disclaims warranty protection and agrees to limits on otherwise available remedies. 2
The legality of these licensing agreements has been questioned.'
Notwithstanding these doubts, Louisiana 4 and Illinois5 have enacted legislation declaring the license agreements binding; the legislation is referred
to as a "shrink wrap law." Purportedly, states enact the legislation in
order to attract high technology industry, including software manufacturers, to the state. 6 The legislation, however, does not encourage softCopyright 1987, by LOUISIANA LAW REVIEW.
Assistant Professor of Business Law, Louisiana State University. The author
acknowledges the assistance of Lisa Rogers in preparation of the manuscript.
1. See generally Peys, Commercial Law-The Enforceability of Computer "BoxTop" License Agreements Under the U.C.C., 7 Whittier L. Rev. 881 (1985); Einhorn,
The Enforceability of "Tear-me-open" Software License Agreements, 67 J. of Pat. Off.
Soc'y 509 (1985); Stern, Shrink-Wrap Licenses of Mass Marketed Software: Enforceable
Contracts or Whistling in the Dark?, 11 Rutgers Computer & Tech. L. J. 51 (1985).
2. See Peys, supra note 1, at 882.
3. See Einhorn, supra note 1,at 518-19.
4. Louisiana Software License Enforcement Act, La. R.S. 51:1961-1966 (Supp. 1987).
5. Illinois Software License Enforcement Act, Ill. Ann. Stat. ch. 29, para. 801-808
(Smith-Hurd 1987). Other states which have expressed some interest in this legislation are
California, Arizona, Georgia, Washington, and Hawaii. See Einhorn, supra note 1, at
910 n.33.
6. Peys, supra note 1, at 910, citing Russo, Do Box-Top Software Licenses Work?,
2 Software Protection 1, 12 (1984). See also Einhorn, supra note 1, at 518-19 and n.39.
*
LOUISIANA LA W REVIEW
[Vol.48
ware manufacturers to organize in a state that has enacted a shrink
wrap law; rather, it encourages manufacturers to sue software users in
7
that state and thus ironically discourages the use of technology therein.
Louisiana's Software License Enforcement Act is a study in ambiguity. Louisiana Revised Statutes 51:1963 provides that an act which
indicates acceptance (either breaking the seal of the cellophane wrap or
using the software) binds the user to all of the provisions in the agreement. 8 The statute then lists certain provisions which are deemed accepted, 9 assuming that they are conspicuously displayed and clearly
communicated.10 Although warranty disclaimers and limitation of remedies are not specifically mentioned in the statute, the disclaimers should
be deemed accepted under section 1963." Therefore, the user who suffers
consequential damages due to malfunctioning of the software is without
a statutory remedy notwithstanding Louisiana law's general discouragement bf warranty disclaimers. 2 Additionally, while Louisiana's Software
7. "As drafted, [Louisiana's] Act is self-defeating since non-Louisiana based software
publishers can take advantage of the statute, while Louisiana based companies are subjected
to the law. The Act actually is a disincentive for high technology companies to locate in
Louisiana." Peys, supra note 1, at 911.
8. La. R.S. 51:1963 (Supp. 1987).
9. La. R.S. 51:1964 (Supp. 1987). The terms deemed accepted if contained in the
license agreement are: (1) retention of title, and if title is retained, then (2) prohibitions
on copying; (3) prohibitions on modifying, adapting, translating, reverse engineering,
decompiling, disassembling, and creating derivative works; (4) prohibitions on transfer,
assignment, rental, sale or other disposition, with exception for transfer by sale of a
business; and (5) automatic termination without notice of the license for breach.
10. La. R.S. 51:1963 and 51:1965 (Supp. 1987). The license agreement must provide
that either opening or using the software constitutes acceptance; otherwise the license
agreement presumably is not one covered by the Act. The agreement must also provide
a means for the consumer to reject the terms and receive his money back.
11. These are not all of the provisions contained in the standard license agreement;
disclaimers on warranty and limitation of remedies are prevalent. They are not listed
under La. R.S. 51:1964, though under La. R.S. 51:1963 they conclusively are deemed
accepted. The warranty disclaimers and remedy limitations are ordinarily couched in the
terms of Article 2 of the Uniform Commercial Code. See U.C.C. § 2-316 (1977). Louisiana
has not adopted Article 2 of the U.C.C.; as will be mentioned later, such warranty
disclaimers are rarely effective in Louisiana. See La. Civ. Code art. 2520; La. R.S.
51:1401-1408. See also La. Civ. Code arts. 2475 and 2476, and infra text accompanying
note 198.
12. Louisiana law provides that the implied warranty against redhibitory defects may
be disclaimed only if (1) the disclaimer is written in clear and unambiguous terms, (2)
the disclaimer is contained in the sale document, and (3) the disclaimer is brought to the
attention of the buyer or explained to him. See Prince v. Paretti Pontiac Company, Inc.,
281 So. 2d 112 (La. 1973); Theriot v. Commercial Union Insurance Co., 478 So. 2d 741
(La. App. 3d Cir. 1985); Jeansonne v. Leon Pickard Chevrolet, 447 So. 2d 551 (La.
App. 1st Cir. 1984); General Motors Acceptance Corp. v. Johnson, 426 So. 2d 691 (La.
App. 1st Cir. 1982), writ denied, 433 So. 2d 151 (La. 1983); Tuttle v. Lowrey Chevrolet,
Inc., 424 So. 2d 1258 (La. App. 3d Cir. 1982); Webb v. Polk Chevrolet, Inc., 387 So.
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MASS MARKETED SOFTWARE
License Enforcement Act provides that it is not "intended to limit in
any manner . . . the laws of this state . .. or any other laws,"' 3 there
is strong evidence that if the first two provisions of the Act are applied,
both Louisiana law 4 and federal copyright law 5 will be changed. Hence,
all of the Act's provisions cannot be applied consistently.
The Illinois Software License Enforcement Act 16 is less ambiguous;
the person whose act constitutes acceptance of the license agreement
must only abide by the provisions listed in the statute. 7 The terms listed
are substantially the game as those listed by Louisiana's Act, except for
two additional provisions concerning attorneys' fees and use of the
program on a single CPU by a single individual. 8 Further, the Illinois
statute specifies three areas of law which the Act is deemed not to alter
or affect: taxing of software, 9 copyright,20 and consumer fraud and
2
deceptive business practices.
Whether the software license enforcement acts will be upheld by the
courts has yet to be answered. 22 This article discusses the provisions
2d 1240 (La. App. 1st Cir. 1980), writ denied, 390 So. 2d 1344 (La. 1980). Therefore,
the warranty disclaimer language contained in software licenses might be invalid were it
not for the Act's provisions conclusively deeming acceptance.
13. La. R.S. 51'1966 (Supp. 1987)..
14. See text accompanying infra notes 117-121.
'15. See generally 17 U.S.C. § 117 (1982 & Supp. IV 1986). The Copyright Act of
1976, Pub. L. N6. 94-553, 90 stat. 2541, as amended by Copyright Act of 1980, Pub.
L. No. 96-517, 94 stat. 3015, provides that the owner of a copy of a computer program
may make copies for backup purposes and may adapt the copy of the computer program
for use on her machine. Louisiana's Software License Enforcement Act validates prohibitions in software license agreements against any copying and modifying. This appears
to be an attempt to limit federal copyright law.
16. Il. Ann. Stat. ch. 29, para. 801-808 (Smith-Hurd 1987).
17. Il.Ann. Stat. ch. 29, para. 803 (Smith-Hurd 1987): "A person who acquires a
copy of computer software will be conclusively deemed to have accepted and agreed to
those provisions of the license agreement accompanying the copy which are described in
Section 4 below ...." There is no provision that all of the terms of the license agreement
are deemed accepted. However, section 805 provides, "The provisions of this Act will
not limit in any manner the effectiveness or enforceability of any of the other provisions
of a license agreement accompanying computer software under other provisions of the
laws of this State ...."
18. Il. Ann. Stat. ch. 29, para. 804(5) and (7) (Smith-Hurd 1987). The prohibition
against use of the software on more than one machine by more than one individual is
similar to standard 'software license provisions which provide that the licensee may only
use the software on a single machine. See generally Harper, Jr., Software Licensing for
Installations With Multiple Microcomputers, 9/3" Computer Educ. 165 (1985).
19. Ill. Ann. Stat. ch. 29, para. 806 (Smith-Hurd 1987).
20. Ill. Ann. Stat. ch. 29, para. 807 (Smith-Hurd 1987).
21. Ill.
Ann. Stat. ch. 29, para. 808 (Smith-Hurd 1987).
22. See, e.g., Vault Corp. v. Quaid Software Ltd., 655 F. Supp. 750, 763 (E.D. La.
1987). Additionally, Lotus Development Corp. has filed suit against a company user. Lotus
90
LOUISIANA LAW REVIEW
[Vol.48
contained in software agreements, the interaction of those provisions
with current law, and the possible preemption of Software License
Enforcement Acts by federal copyright law. The license agreement is
discussed in terms of the Uniform Commercial Code, common law,
Louisiana law and federal copyright law. Part I outlines the interests
of the parties, the software manufacturer and user. Part II discusses
the legality of the major software agreement provisions and the applicability of relevant law that may make those provisions invalid.
I.
COMPETING INTERESTS OF THE PARTIES
A. Interests of Software Manufacturers
Software manufacturers have struggled to ensure protection of their
proprietary rights to the intellectual property embodied in their computer
programs. Until the 1980 amendments to the federal copyright law, 23
there was little recognition of proprietary rights at the federal level;
computer programs were not widely considered copyrightable. 24 Even
Dev. Corp. v. Rixon, Inc., Civ. No. 84-278-C (D. Mass. Sept. 20, 1984) (dismissed without
prejudice), discussed in 2 Computer L. Rep. 1036 (May 1984). The parties settled out of
court. See Stern, supra note 1, at 52 nn.7 and 8. A suit has been filed in Florida by a
construction company against Lotus, alleging that one of Lotus' mass marketed software
programs caused it to underbid on a job. See Suit Alleges Software Error, ABA Journal
22 (Dec. 1, 1986) [hereinafter Software Error].
23. The Copyright Act of 1976 was amended in 1980 to include a definition of
"computer program," thus legitimizing copyright protection of computer programs. Copyright Act of 1980, Pub. L. No. 96-517, § 10(a), 94 Stat. 3015, 3028 (codified as amended
at 17 U.S.C. § 101 (1982 and Supp. IV 1986)). Also, section 117 of the Copyright Act
of 1976 was amended to permit owners of copies of computer programs to make backup
copies and to adapt copies of programs for their own use. Pub. L. No. 96-517, 10(b),
94 Stat. 3015, 3028 (codified as amended at 17 U.S.C. § 117 (1982 and Supp. IV
1986)). Previously this section has provided that the law was frozen concerning copyright capability of computer programs: "[T]his title does not afford to the owner of
copyright in a work any greater or lesser rights with respect to the use of the work in
conjunction with automatic systems capable of storing, processing, retrieving, or transferring information, or in conjunction with any similar device, machine, or process, than
those afforded to works under the law ....
" Copyright Act of 1976, 17 U.S.C. § 101,
90 Stat. 2565.
24. See, e.g., Data Cash Systems, Inc. v. J.S. & A. Group, Inc., 480 F. Supp. 1063
(N.D. I1. 1979), aff'd on other grounds, 628 F.2d 1038 (7th Cir. 1980) (computer program
contained on ROM chip not fixed in tangible medium of expression from which it could
be perceived, so not copyrightable); Synercom Technology, Inc. v. University Computing
Co., 462 F. Supp. 1003 (N.D. Tex. 1978) (copyright could not subsist in computer program
because the idea could only be expressed by using sequences and commands similar to
plaintiff's). See also, United States Copyright Office, Announcement SML-47, 11 Bull.
Copyright Soc'y. 361 (1964) (announcing that computer programs in object code would
be registered under the copyright office's rule of doubt); "Rule of Doubt" Procedure
Itself Put in Doubt in Correspondence With the Copyright Office, 1-8 Software Protection
2-7 (May, 1983).
19871
MASS MARKETED SOFTWARE
with the current federal legislation, 25 software producers feel that the
protection afforded by copyright is insufficient for their needs.2 6 While
patent provides more protection for the inventor than does copyright
for the author, most computer programs do not qualify for the high
standards of novelty required to obtain patent protection.27 Therefore,
software manufacturers have traditionally relied on state trade secret law
to protect their proprietary interests. 28 Such law, however, is neither
uniform, nor entirely adequate .29
Copyright law fails to adequately resolve three problem areas for
the software manufacturer. First is individual copying. Copying computer
programs contained on floppy discs is simple30 if the program is not
copy protected. 3 Detection, on the other hand, is difficult. Considering
25. See, e.g., Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240
(3d Cir. 1983), U.S. cert. dismissed, 464 U.S. 1033, 104 S. Ct. 690 (1984). But see
Samuelson, CONTU Revisited: The Case Against Copyright Protection for Computer
Programs in Machine-Readable Form, 1984 Duke L. J. 663 (1984).
26. Copyright protects only the expression, not the underlying idea. 17 U.S.C. §
102(b) (1982 and Supp. IV 1986): "In no case does copyright protection for an original
work of authorship extend to any idea, procedure, process, system, method of operation,
concept, principle, or discovery, regardless of the form in which it is described, explained,
illustrated, or embodied in such work." Some writers have proposed legislation which
would be a hybrid between patent's protection of the idea and copyright's protection of
the expression of the idea, which would be more consistent with the particular interests
of the computer industry. See, e.g., Comment, Softright: A Legislative Solution to the
Problem of Users' and Producers' Rights in Computer Software, 44 La. L. Rev. 1413
(1984) [hereinafter Softright]. Additionally, legislation has been introduced to amend the
copyright laws to expressly prohibit software rental. See Einhorn, supra note 1, at 52324, describing Senator Mathias' bill, reprinted in 130 Cong. Rec. S13706 (daily ed. Oct.
5, 1984).
27. See Diamond v. Diehr, 450 U.S. 175, 101 S. Ct. 1048 (1981) (computer program
that cured synthetic rubber was patentable because it was sufficiently original). The
underlying algorithms used to create computer programs are not protectable, but are part
of the public domain. As a result, the Patent Office and those who apply for patents
are unsure of which programs qualify for patent protection. A further disadvantage of
patent is that it takes approximately three years to get a patent registered, during which
time most mass marketed software becomes obsolete. See Note, An Anomaly in the Patent
System: The Uncertain Status of Computer Software, 8 Rutgers Computer & Tech. L.
J. 273 (1981).
28. See, e.g., Comment, Computer Programs and Proposed Revision of the Patent
and Copyright Laws, 81 Harv. L. Rev. 1541, 1553 (1968).
29. The law is based on the Restatement of Torts, § 757(b) (1939). There is a new
Uniform Trade Secret Act, which has been adopted by several states. See Uniform Trade
Secrets Act, sect. 1, 14 U.L.A. 541-42 (1985). For a brief discussion of trade secret law
as it applies to software, see infra text accompanying note 151.
30. Most microcomputers have dual disc drive; the user can insert the software in
drive A and copy on to a blank disc in drive B. Only one CPU is required.
31. Copy protection can be done in myriad ways. Usually the software is programmed
so that a copy will not run. There are many variations on the theme, from using laser
beams to programming the software to jam the computer should the user attempt to copy
the program. See Einhorn, supra note 1, at 522 and n.45.
LOUISIANA LAW REVIEW
[Vol.48
that retail prices for software can reach several hundred dollars, while
a blank disk costs only a few dollars, the incentive to copy is obvious.
Although estimates are available,3 2 there is no way to determine how
much software is illegally copied for personal use. This problem is not
new; personal use copying of protected works has been done with
photocopy machines, tape recorders, and, most recently, videocassette
recorders. Enforcement of copyright laws against individuals is impractical, and some argue that individual copying constitutes fair use. 3 The
loss of revenues to software manufacturers attributable to personal use
3 4
copying could be substantial.
The second problem area is software rental. Generally, copyright
law allows the owner of a copy of a copyrighted work to dispose of
it as he pleases, presumably allowing rental to a third party.35 The
36
software rental issue is similar to the video tape rental controversy.
The renter can simply copy the rented disk or tape onto a blank disc
and retain the copy. Although the owner of a copy of a computer
program may rent it without violating the copyright owner's rights, the
individual who makes a copy from the rented copy is infringing. Again,
the problem becomes one of inability to detect individual copiers. The
doctrine of contributory infringement imposes liability on owners of
copies who knowingly permit others to illegally copy.3 7 In Sony Cor-
32. Einhorn, supra note 1, at 510, citing Salisbury, Computer Industry Toughens its
Surveillance of Software Pirates, Christian Science Monitor 5 (March 14, 1984); Green,
Sterne and Saidman, Mass-Marketed Software, 10 BYTE 387 (Feb. 1985). The estimates
range from 1 to 20 unauthorized copies for each disk of software purchased. For estimates
of the economic impact on the industry, see sources cited in Einhorn, supra note 1, at
510 n.3.
33. See 17 U.S.C. § 107 (1982 and Supp. IV 1986). To a degree, individual copying
for personal use is fair use. See Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417,
104 S. Ct. 774 (1984). But the Supreme Court did not state that all individual copying
is fair use; it simply held that, under the particular circumstances where the plaintiff studio
could not show economic harm because advertisers paid for the television broadcasts whether
the home viewers watched the movies or not, copying televised movies for the sole purpose
of viewing them at a later time was fair use of a copyrighted work.
34. Einhorn, supra note 1, at 510 and n.3.
35. 17 U.S.C. § 109 (1982 and Supp. IV 1986): "[Tjhe owner of a particular copy
...lawfully made under this title . . . is entitled, without the authority of the copyright
owner, to sell or otherwise dispose of the possession of that copy.
... This is generally
known as the first sale doctrine. It is limited in certain circumstances such as the public
performances of plays. But see Colby, The First Sale Doctrine-The Defense That Never
Was? 32 J. Copyright Soc'y 77 (1984) (arguing that the first sale doctrine was never
intended to permit rental).
36. See generally Kane-Ritsch, The Video Tape Rental Controversy: Copyright Infringement or Market Necessity?, 18 J. Marshall L. Rev. 285 '(1985).
37. See generally Wilson, Software Rental, Piracy, and Copyright Protection, 5 Computer/L. J. 125 (1984); Kane-Ritsch, supra note 36.
1987]
MASS MARKETED SOFTWARE
poration of America v. Universal City Studios,3" the United States Supreme Court established guidelines for applying the doctrine of
contributory infringement. Not only must the rental company be aware
of the infringing use being made of the rented copy, but the lessee must
be making an infringing use of the copy.3 9 The Sony Court decided
that copying of television programs for the purpose of time-shifting was
not copyright infringement, but fair use of a copyrighted work; hence
the manufacturer of a videocassette recorder was not-liable for copyright
infringement under the contributory infringement doctrine. Thus, the
copyright laws as interpreted by courts appear to address the software
rental problem, although perhaps inadequately.The third problem area involves reverse engineering 4' to discover
and use a program's algorithms. A competitor may reverse engineer
software to discover how to make another program compatible with
certain hardware, or to manufacture hardware that will run a certain
type of software. The legality of reverse engineering is uncertain.4 2 Trade
secret law does not generally recognize a cause of action when a competitor has legally obtained the product, taken it apart, discovered the
"secret," and then marketed a competing product. 43 Reverse engineering
may, however, result in copyright infringenient. For instance, in Whelan
Associates, Inc. v. Jaslow Dental Laboratory, Inc., 44 the court found
copyright infringement when the defendant, who had legal access to the
product, essentially reverse engineered it and rewrote the program so
that it would run on other computers. Similarly, in Broderbund Software,
Inc. v. Unison World, Inc. ,4 copyright infringement under the traditional
substantial similarity test was found when the defendant reverse engineered the copyright owner's program and marketed the rebuilt program.
The software licensing agreement is designed to ensure legal protection for the software producer from these three practices and others
which reduce the revenues that the software manufacturer would be
38.
464 U;S. 417, 104 S. Ct. 774 (1984).
39. Id. at 434-42, 104 S. Ct. at 784-88.
40. See Einhorn, supra note 1, at 523-24.
41. "Reverse engineering is the process of examining and analyzing a product to
discover the process by which it was created." Softright, supra note 26, at 1432. The
author cites cases finding reverse engineering a legal means of discovering a competitor's
secret.
42. Stern, supra note 1, at 68-69. See also text accompanying infra note 159.
43. See Softright, supra note 26, at 1432. For protection the information must be
secret, i.e., novel and of value. See Restatement of Torts, § 757(b) (1939). It is difficult
to consider anything about mass marketed products to be secret. See Stern, supra note
1, at 68.
44, 797 F.2d 1222 (3d Cir. 1986).
45. 231 U.S.P.Q. 700 (N.D. Cal. 1986).
LOUISIANA LA W REVIEW
[Vol.48
collecting. 46 Under contract law, if the software user consents to these47
limitations, then the agreement of the parties is the law between them,
absent a determination that the agreement is invalid or contrary to public
policy.
B. Interests of Software Users
Software users, on the other hand, have quite different interests. It
may be said that there is no typical user; businesses, institutions and
individuals use software for diverse purposes. These different users share
a primary interest in having a product that does what it is intended to
do. Although purchasers ordinarily enjoy the benefit of a warranty to
protect this interest, most mass marketed software is sold under a
disclaimer of warranty.
Software users share a second interest in being able to transfer
ownership by reselling any used software which the user no longer needs.
If the software agreement's provision for retention of title by the producer is binding, the user has no right to resell the software.
A third interest of the user is in adapting a program for his own
particular needs. Many software agreements prohibit the user from altering or modifying the program. Copyright law provides the owner of
a copy of a computer program a limited right to modify the program;
as a purchaser, a software user would have the benefit of this law.
Finally, all users share an interest in being able to purchase software
at reasonable prices. Mass marketed software is expensive, presumably
due to high development costs and insufficient competition. Logically,
if there were no illegal copying of computer programs, the individual
cost would be lower, since increased sales would allow the software
4
producers to spread the cost of development over a larger buying market. 1
Currently, however, the user pays a higher price, yet forfeits his opportunity to recoup the purchase price due to the provision prohibiting
resale.
From the point of view of the user, the licensing agreement is unfair.
Users relinquish the right to recover damages for software that has
malfunctioned, to make software adaptable to particular needs, or to
recoup expenses incurred in the original transaction by reselling used
46. Stern, supra note 1, at 51-53; Einhorn, supra note 1, at 524.
47. But several older United State Supreme Court cases have held that one cannot
expand patent rights by license agreement. See United States v. Masonite Corp., 316 U.S.
265, 62 S. Ct. 1070 (1942); Boston Store of Chicago v. American Graphophone Co.,
246 U.S. 8, 38 S. Ct. 257 (1918); Straus v. Victor Talking Machine Co., 243 U.S.
490, 37 S. Ct. 416 (1917); and Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 28 S. Ct. 722
(1908).
48. See generally Wilson, supra note 37, at 125.
1987l
MASS MARKETED SOFTWARE
software. From the software producer's perspective, the agreement is a
necessary supplement to currently available legal protections. In the
struggle to determine an appropriate rule of law, the interests of each
party are clearly apposite.
II.
SHRINK WRAP PROVISIONS
The effect of licensing statutes upon the body of law surrounding
software transactions may be determined by examination of the statutes,
the agreements, and the governing legal system, whether the Uniform
Commercial Code, the common law, or Louisiana's civil law. First, the
insistence of the software producers and the legislatures of Louisiana
and Illinois that these transactions are in fact licensing agreements is
analyzed. Second, the software agreement's provision that opening the
package binds the user is discussed from several different perspectives.
Third, the validity of prohibitions against copying, transferring, or modifying software is considered. Finally, disclaimer of warranty and limitations on remedies are examined.
A. License or Sale?
The ordinary software agreement provides that the producer retains
title and that the consumer is granted a license to use the program
subject to the limitations set forth in the agreement. 49 A license grants
permission to use or to do a thing which the licensor could otherwise
preventA0 Cases under both the U.C.C. and Louisiana law, however,
suggest that an agreement licensing the use of a product that has been
effectively sold or whose ownership has been otherwise transferred is
invalid. Such law is relevant to consideration of a software transaction,
where, considering the cost of a program, the user pays a purchase
price."
1. Application of the U.C.C.
Commentators analyzing the shrink wrap provisions argue that Article 2 of the Uniform Commercial Code (U.C.C.) on sale of goods
49. This clause is said to be the "most relied upon to prevent rental and other
practices of which software proprietors disapprove." Stern, supra note 1, at 53.
50. Black's Law Dictionary 1067 (4th ed. 1968).
51. ITihe courts are likely to hold that so flimsy a device as purported title retention
via a shrink-wrap license cannot justify denying the purchaser of a copyrighted
product the right to use the product as he or she wishes. A good deal of
balancing interests of the public in what they pay for in the marketplace against
the investment interests of copyright owners has gone on in the courts and
Congress over the last hundred years.
Stern, supra note 1, at 58.
LOUISIANA LA W REVIEW
[Vol.48
applies to these transactions even though they are styled licenses, not
sales.5 2 53
This presents the first analytical problem. Arguably, the only
"good"
sold in a software transaction is the disc itself. The intellectual
4
property, i.e., the program, contained on the disk is intangible.1
Moreover, if software is treated as a service rather than a good,
the U.C.C. is inapplicable. Although such an analysis may be applied
to contracts for installation of computer systems and to custom made
software, most authorities agree that mass marketed software should be
treated as goods under the U.C.C: Although U.C.C. Article 2 applies to transactions in goods,5 "transaction" is not defined. Article 2 does define a "sale" as a transfer of
title for a consideration known as the price.5 7 However, Article 2 has
been applied by courts in transactions other than strict sales.5 This
52. See Peys, supra note 1; Stern, supra note 1; and Einhorn, supra note 1. See
also U.C.C. § 2-102 (1978): "[Tlhis Article applies to transactions in goods ...."
53. U.C.C. § 2-105(1) (1978): 'Goods' means all things . .. which are movable at
the time of identification to the contract for sale other than the money in which the
price is to be paid, investment securities ... and things in action."
54. Einhorn, supra note 1, at 515; Note, Computer Programs as Goods Under the
U.C.C., 77 Mich. L. Rev. 1148 (1979); Peys, supra note 1, at 885-92. In Schneider,
Taking the "Byte" out of Warranty Disclaimers, 5 Computer Law J. 531, 534-35 (1985),
it is stated that:
[tlhe. question of whether computer programs are goods for the purpose of
U.C.C. coverage must be examined. This question is difficult, for by exhibiting
characteristics of both concrete property and abstract knowledge, computer
programs do not fit easily into either of the contract law's traditional categories
of goods or services. A program is in essence intangible intellectual property.
These ideas, however, must be given tangible form, and this transformation
allows the inference that the 'ideas' have been made into 'movable' goods.
Software might be considered intangible property. Software has been treated as an
intangible for federal tax purposes, but as tangible for wire fraud purposes. Einhorn,
supra note 1,at 515. It is unlikely, however, that a court will treat a computer program
contained on a tangible disc as intangible property. By analogy, books are considered
goods for Article 2 purposes, even though the ideas embodied in books are intangible
property.
55. See Schneider, supra note 54, at 534-36, discussing Computer Servicenters, Inc.
v. Beacon Mfg. Co., 328 F. Supp. 653 (D.S.C. 1970) (agreement to furnish data processing
services is sale of service, not sale of goods), and Triangle Underwriters, Inc. v. Honeywell,
Inc., 457 F. Supp. 765 (E.D.N.Y. 1978) (agreement to develop and install a completed
computer system, with custom designed software, was sale of goods). See also Peys, supra
note 1,at 885-92, discussing in detail the goods vs. services dichotomy in Article 2 caselaw.
See also Software Error, supra note 22. "The courts are split on whether software is
a product or a service, according to Roberts [a Chicago lawyer and computer law expert].
'If the\software comes off the shelf, it more likely will be found to come under the
UCC. But if it's custom-made software, then it more likely will be seen as a service.'
56. U.C.C. § 2-102 (1978).
57. U.C.C. § 2-106(1) (1978).
58. Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial
Code, 39 Fordham L. Rev. 447 (1971).
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judicial practice is consistent with the U.C.C.'s mandate that it be
interpreted broadly to effectuate its purposes.5 9 Courts examine the substance of an agreement; if a transaction has the attributes of a sale, it
will be treated as a sale.60 For example, if a court finds that the lessee
was in fact paying a purchase price, rather than merely a rental fee, it
will treat the transaction as a sale.
Thus, if the transaction is considered a sale, Article Two of the
U.C.C. will be applied, resulting in some degree of predictability and
uniformity of treatment among the various states. Further, the Copyright
Act's first sale doctrine would apply, resulting in a judicial finding that
the software manufacturer's attempts to restrict further transfer of the
purchased copy of the software are invalid, at least for copyright infringement purposes.
2. Application of Louisiana Law
Although Louisiana has not adopted Article 2 of the U.C.C., Louisiana does have articles governing sales and conventional obligations
(contracts) in the Louisiana Civil Code. 6' As will be discovered, in some
situations Louisiana's law avoids certain analytical problems created by
Article 2.
The characterization of the software as intangible property does not
alter the protection afforded by Louisiana law. Louisiana's Civil Code
provisions on sales apply to all forms of property, including incorporeal
property. 62 Recognizing the distinction between goods (property) and
services, Louisiana does not include services in its sale provisions. However, there is little likelihood that a court would consider the sale of
software to be a sale of a service.
Under the Louisiana Civil Code, a valid sale requires consent as to
the thing and the price. 63 Louisiana's law of obligations generally applies
59. U.C.C. § 1-102(l)-(2) (1978).
60. See, e.g., Lease Finance, Inc. v. Burger, 40 Colo. App. 107, 575 P.2d 857 (Colo.
App. 1977) (apply Article 2 to leases if the lease can be characterized as a sale). See also
E. Farnsworth, Implied Warranties of Quality in Non-Sales Cases, 57 Colum. L. Rev.
653 (1957).
61. La. Civ. Code, Book III, Titles III, IV, and VII.
62. La. Civ. Code arts. 2448-2455. Louisiana does not have intangible property, but
it has a similar classification, incorporeal property. Article 2449 provides: "Not only
corporeal objects, such as movables and immovables, livestock and produce, may be sold,
but also incorporeal things, such as a debt, an inheritance, the rights, titles and interests
to an inheritance or to any parts thereof, a servitude or any other rights."
63. La. Civ. Code art. 2439. "The contract of sale is an agreement by which one
gives a thing for a price in current money, and the other gives the price in order to have
the thing itself. Three circumstances concur to the perfection of the contract, to wit: the
thing sold, the price and consent."
LOUISIANA LAW REVIEW
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to a sale.64 Louisiana has adopted the U.C.C. approach for purposes
of applying its sales laws to a transaction styled a lease but having
characteristics of a sale. 65 The same analysis has been applied to license
agreements where, as with a lease, title is not transferred. For instance,
the Louisiana Supreme Court held in General Talking Pictures Corp.
v. Pine Tree Amusement Co., Inc.,6 that a license of movie equipment
was in fact a sale such that the "licensee" could transfer the property
to a third party. 67 Hence, in Louisiana licenses and leases are treated
as sales if the transaction has the attributes of a sale.
3. Licenses Under the Federal Copyright Law
Computer software is usually protected by copyright law, which
establishes the rights of the copyright owner, generally the software
producer, as regards distribution of copies of the copyrighted software.
Additionally, copyright law provides rights to the owners of copies. One
such right of the lawful owner of a copy is to transfer her copy to a
third party. As previously noted, software licenses generally prohibit
such transfers.
A series of United States Supreme Court cases 68 held that patent
and copyright holders could not enlarge the scope of protection provided
by federal laws through use of a license. All of the cases involved the
fixing of resale prices of patented or copyrighted property which the
Court found had already been sold. The cases are consistent with copyright law's first sale doctrine which says that once the copyright owner
has transferred ownership of a copy, he has no control over further
disposition of the copy. 69 Taken in that context, the cases are hardly
dispositive of the issues presented in this article. A software license does
not purport to fix resale prices, but prohibits resale altogether.
64. La. Civ. Code art. 2438. See Litvinoff, Offer & Acceptance in Louisiana Law:
A Comparative Analysis: Part I-Offer, 28 La. L. Rev. 1 (1967); Litvinoff, Offer &
Acceptance in Louisiana Law: A Comparative Analysis: Part II-Acceptance, 28 La. L.
Rev. 153 (1968) [hereinafter Litvinoff, Part II-Acceptance).
65. Howard Trucking Co., Inc. v. Stassi, 485 So. 2d 915 (La. 1986).
66. 180 La. 529, 156 So. 812 (1934).
67. Id. In that case, the license to use was limited to ten years, a factor which would
seem to indicate that in fact it was a license. Id. at 813. Software licenses are of indefinite
duration, even more persuasive evidence that they are to be treated as sales under Louisiana
law.
68. Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 38 S. Ct.
257 (1918); Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502,
37. S. Ct. 416 (1917); Straus v. Victor Talking Machine Co., 243 U.S. 490, 37 S. Ct.
416 (1917); Bauer v. O'Donnell, 229 U.S. 1, 31 S. Ct. 376 (1912); Dr. Miles Medical
Co. v. Park & Sons Co., 220 U.S. 373, 31 S. Ct. 376 (1911); Bobbs-Merrill Co. v.
Straus, 210 U.S. 339, 28 S. Ct. 722 (1908).
69. 17 U.S.C. § 109(a) (1986 Supp.). See also, Colby, supra note 35, at 91.
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While the Supreme Court cases may not serve as precedent for a
court faced with the issue of whether a software license is in fact a
sale, some of the Court's dicta may shed light upon the issue. First,
in Boston Store of Chicago v. American Graphophone Co.,70 the agreement that the Court found to be a sale was a contract signed by the
defendant/licensee which purported to be both a license and a sale, and
which placed restrictions on persons to whom the graphophones could
be sold as well as on the resale price. The Court invalidated the license
agreement as attempting to enlarge the scope of powers granted by
patent law. The Court also indicated that there would be no contractual
or common law remedy for breach of the license agreement, presumably
because such retention of control over disposition of property after it
has been sold is inimical to the common law. 71 In a software license
transaction, the license agreement is rarely signed by the software user;
the license stipulates that opening the package constitutes assent to the
terms. If the rationale in Boston Store were followed, certain breaches
of the license agreement by the user would not constitute either copyright
infringement or breach of contract.
72
Motion Picture Patents Co. v. Universal Film Mfg. Company
involved restrictions on use, as well as fixing of resale prices. The
restrictions on use were stated in two places: on the written contract
between the patent owner and the manufacturer7 3 and on a plate which
the manufacturer agreed to attach to each machine indicating that the
sale of the machine was subject to restrictions regarding motion pictures
to be played on it. The manufacturer sold the machine under a license
agreement, but the machine was then leased to a third person, not a
party to the contract. ' The Court considered only the validity of the
notice attached to the machine, which it found to be invalid with
respect to supplementing the patent owner's exclusive rights to make,
use, and sell the product. 75 Similarly, some software licenses purport to
70. 246 U.S. 8, 38 S. Ct. 257 (1918).
71. 246 U.S. at 25 and 27, 38 S. Ct. at 261. But that part of the case appears to
have been ignored; most sources indicate that even if the transaction is a transfer of
ownership for copyright purposes, the aggrieved copyright owner still has a cause of
action for breach of the agreement. See infra text accompanying note 145.
72. 243 U.S. 502, 37 S. Ct. 416 (1917).
73. The manufacturer was a licensee under patent law. The owner of a patent may
license others to use the patented invention in manufacturing and selling a product. This
is a true license. See Black's Law Dictionary 1068 (4th ed. 1968). This was not the license
at issue.
74. 243 U.S. at 507, 37 S. Ct. at 417. The machine had been sold under the license
agreement to Seventy-Second Street Amusement Company, which leased the premises and
the equipment including the machine to Prague Amusement Company. The latter was the
company displaying the films, which display the patent owner had forbidden under the
license agreement.
75. 243 U.S. at 516, 37 S. Ct. at 420.
LOUISIANA LAW REVIEW
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restrict use of the program to a single machine. Under this reasoning,
such a restriction is invalid.
Straus v. Victor Talking Machine Co.76 is particularly relevant to a
discussion of licensing agreements. Victor manufactured phonographs
under patents and marketed them by means of licensing agreements.
The license lasted the duration of the patent, but, at the expiration of
the patents, the machine would become the licensee's property. Title
was expressly reserved in Victor. The machines were transferable, but
only upon payment of a minimum "royalty" and only if the conditions
of the license agreement were observed: (I) that the machine could only
be used with Victor's accessories; (2) that the agreements must be signed;
and (3) that liability would be based not only on patent infringement,
but also on breach of contract. Additionally, a notice was affixed to
the machines.
The Court found that the purpose of the 'License Notice' plainly
is to sell property for a full price, and yet to place restraints upon its
further alienation, such as have been hateful to the law from Lord
Coke's day to ours, because obnoxious to the public interest. '77 The
Court in that case also found that the licensing scheme was unjust to
purchasers, most of whom would not read the notice on the property,
or, if they did, would not understand
it.78
The Court found that the transaction was a sale, not a license. 79 It
indicated that a license is something in which (1) the licensee makes
periodic payments or pays a fee other than a purchase price; (2) retention
of title is done for purposes of retaining records, generally to retain a
security interest; and (3) there is a set term for expiration of the right.8 0
By comparison, the software license (1) has a set fee comparable to the
expected purchase price, (2) provides for retention of title merely to
prevent the transaction from being called a sale, and (3) has no term
for expiration of the license.
The Court established that the content of an agreement rather than
its name determines whether the parties are in fact engaged in a sale
transaction."' Similarly, the criteria espoused in Straus are supportive of
76.
77.
78.
79.
243
Id.
Id.
Id.
U.S. 490, 37 S. Ct. 412 (1917).
at 500, 501, 37 S. Ct. at 415.
at 501, 37 S. Ct. at 415.
at 498-500, 37 S. Ct. at 414-15.
80. 243 U.S. at 498-500. See also Stern, supra note 1, at 61, wherein the author
recites the characteristics of a genuine license as stated in Straus. The Court concluded
that the real purpose of the license agreement was not to reserve the patent holder's
exclusive right to use its inventions, but to require payment of minimum prices for the
machines after they had already been sold. This cannot be done under patent or copyright
law.
81. Motion Picture Co., 243 U.S. at 498, 37 S.Ct. at 414-15.
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the software user's argument that the software was in fact sold. The
license in Straus was similar to a software license in providing for
retention of title, restrictions on use, payment of a fee, and description
of liability as under both statutory law and the common law of contracts.
It differed in that the licensees were dealers who signed the agreement,
whereas software licensees are end users who rarely sign any agreement.
However, the facts differ more significantly in that the party being sued
in Straus was not a licensee, i.e., not one of the parties to the licensing
agreement. The issue before the Court was actually whether the notice
placed on the machines would bind the defendant, who was a middleman
and not an ultimate consumer.
If circumstances had not changed through the years, the Supreme
Court's holdings in the aforementioned cases might have been dispositive
of the issues presented by the software license situation. Clearly the
software license does not satisfy the Court's traditional ideas of a license.
Additionally, the Court's dicta in Straus concerning the general public's
understanding is applicable, since the average software user may not
understand the legal implications of the license agreement. However,
Straus involved an attempt to use a license to fix resale prices, a practice
prohibited by the antitrust laws; the software license is merely an attempt
to protect rights to the intellectual property embodied on a disc.
It is unknown whether the Supreme Court would adhere to such
criteria today. Most certainly all federal courts do not invalidate licenses
of copyrighted or patented works. By way of analogy, consider licenses
used by motion picture studios to retain rights to films transferred to
movie theaters, distributors, and performers. When a defendant in a
copyright infringement case is charged with infringing the motion picture
studio's copyright in a film, the court must determine whether the film
was in fact sold or licensed. If the film was sold, then the owner of
the copy has the right to sell it to another person. If, however, the
film was transferred under a restrictive license, the transferee may not
have the right to transfer the copy to a third person. This is known
2
as the first sale doctrine .
In United States v. Wise 3 the Ninth Circuit stated the generally
accepted rule that copyright's first sale doctrine does not apply to a
82. 17 U.S.C. § 109 (1982 & Supp. IV 1986). For a more detailed discussion of the
first sale doctrine, see infra text accompanying notes 141-46.
83. 550 F.2d 1180 (9th Cir. 1977), cert. denied, 434 U.S. 929 (1977), rehearing denied,
434 U.S. 977 (1977). See also Columbia Pictures Indus., Inc. v. Redd Home, Inc., 749
F.2d 154, 159 (3d Cir. 1984); American Int'l Pictures, Inc. v. Foreman, 576 F.2d 661,
664 (5th Cir. 1978); United States v. Drebin, 557 F.2d 1316, 1326 (9th Cir. 1977); Hampton
v. 'Paramount Pictures Corp., 297 F.2d 100, 103 (9th Cir. 1960); United States v. Bily,
406 F. Supp. 726, 731 (E.D. Pa. 1975); United States v. Wells, 176 F. Supp. 630, 633
(S.D. Tex. 1959). The Copyright Act at the time these decisions were rendered provided
LOUISIANA LAW REVIEW
[Vol.48
transfer of a copy of a copyrighted work unless title to the copy was
transferred. At issue was whether certain motion picture studios' license
agreements with exhibitors, individual actors, and television companies
were in fact sales of the films. The court examined each agreement to
determine that it was a license both on its face and by its terms. This
technique is similar to that used by the Supreme Court in its resale
price fixing cases as well as to that used by the growing majority of
courts in deciding whether a lease is actually a sale for purposes of
applying the U.C.C. provisions to the transaction.
However, the same court which decided United States v. Wise had
previously found in Hampton v. Paramount Pictures Corp.s4 that a
transaction was a license rather than a sale, 8 even though by its terms
it (1) was of unlimited duration, (2) required a lump payment made
for each film transferred, (3) failed to place any limitations on alteration
of transferred films, and (4) failed to record any retention of title.86
that "[Niothing in this Act shall be deemed to forbid, prevent, or restrict the transfer
of any copy of a copyrighted work the possession of which has been lawfully obtained."
Copyright Act of 1909, ch. 320, § 51, 17 U.S.C. § 27, amended by Copyright Act of
1976, Pub. L. 94-553, 90 Stat. 2541. The courts limited applicability of the section to
title holders rather than mere rightful possessors, as the statute actually said. The present
section 109 refers to a rightful owner of a copy, not a mere possessor; hence the statute
now reads as the courts interpreted it under the old law. See also Colby, supra note 35,
at 90-91, reporting that the first sale doctrine was first established in Bobbs-Merrill v.
Straus, 210 U.S. 339, 28 S. Ct. 722 (1908), and its precursor, Bobbs-Merrill v. Snellenburg,
131 F.2d 530 (E.D. Pa. 1904).
84. 279 F.2d 100 (9th Cir. 1960).
85. The term used was "assignment." Id. at 103.
86. Id. at 103. It is unclear from the statement of the facts whether title was expressly
retained in Paramount or its predecessor. The case is not consistent with U.S. v. Wells,
176 F. Supp. 630 (S.D. Tex. 1959), which the same court in U.S. v. Wise cited with
approval. In Wells a higher standard of proof was required since it was a criminal
copyright infringement case. But, as in Hampton, the copyright owner had transferred
the right to make copies for a specific purpose, "reproduction of maps for [licensee's]
own use, for such time as it deems fit." 176 F. Supp. at 633. The agreement specifically
provided that there was no right to resell maps reproduced under the license. Similarly,
in Hampton the licensee was transferred the right to make copies of films and the right
to license them for nontheatrical purposes. In both cases the licensees exceeded the authority
granted them from the owner by unconditionally selling a copy to a third person. In
both cases it was the third person who was being accused of copyright infringement. In
both cases the issue was or should have been the first sale doctrine. Yet the cases have
differing results. In Hampton the court felt that the defendant who purchased the copy
from someone who purportedly did not have authority to sell was liable because the
licensee, Kodascope, exceeded its authority. The court said:
If the contract in question were ambiguous with regard to its nature as an
assignment or a license or as to the purposes for which Kodascope might make
reproductions, the fact that provisions of the kind referred to above [mentioned
in text] were present or absent would be helpful in construing the instrument.
Here, however, the contract expressly provides that Paramount "licenses" Ko-
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All of the criteria except the third were mentioned by the Supreme
Court in Straus as requirements for a true license, yet the court failed
to discuss its reasons for departing from the Supreme Court precedent.
The major difference between Wise and Hampton is that the former
was a criminal copyright infringement case, which required a higher
standard of proof.
The danger exists that courts will adopt the nondemanding standards
for finding a valid license that were utilized in Hampton. The better
approach is to examine the terms of the agreement and the clear intent
of the transferor, as was done in United States v. Wise. In Wise most
of the contracts in question transferred limited rights for exhibition or
distribution of films for a limited period of time, return of films after
expiration of a certain period, prohibitions on copying and reservation
of title. The court found that such provisions clearly indicate an intention
to retain transfer rights in the product and added that under such
circumstances, a mere failure to reserve title does not require a finding
87
that a sale has been made.
License agreements for movies are somewhat different than those
used by software manufacturers. First, as regards the content of the
agreement, the studios license films in the same manner as a library
would check out books or tapes, whereas parties to a software license
do not contemplate returning the product. The fee paid for a film is
clearly a use or rental fee, whereas the fee paid for software is presumptively a purchase price.
Second, as regards the transaction, the motion picture studio licenses
to exhibitors, distributors and individual actors, and not to the consumer.
The software manufacturer mass markets software to end users, businesses and consumers. Further, a movie tends to be viewed only once
by the viewer, and the use is passive, whereas computer programs are
used both actively and repeatedly.
There appears to be another major discrepancy between the Supreme
Court resale price fixing cases and the motion picture licensing cases.
Even though the license agreement is treated as a sale for copyright or
dascope to do certain things .
279 F.2d at 104. The court in U.S. v. Wells, however, relied on Bobbs-Merrill Co. v.
Straus, 210 U.S. 339, 28 S. Ct. 722 (1908), to find that the restrictions in the agreement
applied to transfer of copies that were authorized in the first place, such that the restriction
on the transfer was invalid.
87. U.S. v. Wise, 550 F.2d at 1191. However, one agreement which was not styled
a license and did not retain title may not have received license status by the court. A
second agreement- provided for payment of the cost of the film, failed to provide for
return of the film, and put few restrictions on use. The court found that this transaction
resembled a sale. Since the case was criminal the government had a higher standard of
proof than would a civil litigant.
LOUISIANA LA W REVIEW
[Vol.48
patent monopoly purposes, whether the plaintiff has a cause of action
based on breach of contract presents a separate issue."8 The Supre me
Court in Boston Store of Chicago v. American Graphophone Co.89 ultimately decided that the invalid license agreement would not provide
the plaintiff with a cause of action based on a common law breach of
contract ° More recently, courts and Congress appear to agree that even
if the transaction is treated as a sale rather than a true license for
copyright infringement purposes, the buyer may still be liable for breach
of contract. 9
This discrepancy proves problematical when dealing with software
licenses. Assume that a court has determined that the transaction in-
88. The Supreme Court in Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 28 S. Ct. 722
(1908) did not consider the breach of contract claim, but only the infringement claim.
However, the case was later cited in United States v. Wells, 176 F. Supp. 630, 634
(S.D. Tex. 1959), for the proposition that if the restriction on transfer was invalid under
the copyright act, then the copyright owner's only remedy was for breach of contract.
In later cases, the Supreme Court indicated otherwise. See infra text accompanying note
145.
89. 246 U.S. 8, 38 S.Ct. 257 (1918).
90. Id. at 25 and 27. Notably, the Court decided that there was neither patent
infringement nor contract breach after reviewing the entire line of cases commencing with
Bobbs-Merrill. See supra text accompanying note 68. Bobbs-Merrill's cautious holding
developed into the Court's broad decision in Boston Store. Interestingly, the only case
which concerned a breach of contract action that adhered to the Supreme Court's holding
in Boston Store was American Int'l Pictures, Inc. v. Foreman, 400 F. Supp. 928 (S.D.
Ala. 1975), rev'd, 576 F.2d 661 (5th Cir. 1978). In that case, the issue was whether
the plaintiff copyright owner or the defendant should bear the burden of proving that
there had been a first sale in a civil copyright infringement case. As in the other motion
picture studio cases, the films had been transferred under an agreement styled a license
or lease. The court relied on a basic rule of property law that possession of property is
indicative of ownership and in so doing placed the burden of proof on the plaintiff to
prove that there had never been a first sale of the films. "This allocation of the burden
of proof is consistent with that policy of law which seeks to provide for the free circulation
of goods in commerce. To facilitate that goal, possession of property is always presumed
lawful ....
Therefore, one asserting a title has the burden of establishing it." 400 F.
Supp. at 933. This was the underlying rationale behind the Supreme Court's holdings in
the Bobbs-Merrill line of cases. The circuit court reversed on that point. The district court
opinion is cited with disapproval in the Committee Report accompanying section 109 of
the new Copyright Act, the revised first sale doctrine. H.R. Rep. No. 1476, 94th Cong.,
2d Sess. 1, reprinted in 1978 U.S. Code Cong. & Ad. News 5659, 5694-95 [hereinafter
House Report.]
91. United States v. Wise, 550 F.2d 1180, 1187, n.10 (9th Cir. 1977), cert. denied,
434 U.S. 929 (1977); rehearing denied, 434 U.S. 977 (1977); American Int'l Pictures, Inc.
v. Foreman, 576 F.2d 661, 664, n.3 (5th Cir. 1978); United States v. Bily, 406 F. Supp.
726, 732 (E.D. Pa. 1975); United States v. Wells, 176 F. Supp. 630, 634 (S.D. Tex.
1959); House Report, supra note 90 at 5693: "This does not mean that conditions on
future disposition of copies of phonorecords, imposed by a contract between their buyer
and seller, would be unenforceable between the parties as a breach of contract, but it
does mean that they could not be enforced by an action for infringement of copyright."
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MASS MARKETED SOFTWARE
volving the software is a sale rather than a true license. Further assume
that the user/purchaser has sold the software to a third party in violation
of the license agreement. The user would not be liable for copyright
infringement because as the owner of the copy he has the right to
transfer his copy. Although he is not violating the copyright law, he
may be liable for breaching the agreement. Previously, however, the
Supreme Court took the position that the common law on contracts
forbids restrictions on a
purchased it. 92 Finally, if
of contract, 93 it may face
provision that the federal
94
regulate the same areas.
buyer's rights in the property once he has
the court does consider the claim for breach
another problem in the new copyright law's
law preempts any state law that purports to
In summary, if the license agreement is found to be a sale or
transfer of ownership, some of the restrictions contained therein may
be invalid, at least under copyright law. If the software manufacturer
chooses to pursue its remedies for breach of contract, it must prove
that the license agreement is a contract and that there has been an
actionable breach.
B. Opening the Package Constitutes Acceptance
Software is predominantly mass marketed in a shrink wrap package
which sets forth the terms and conditions of the agreement on the
package visible through the cellophane wrapper without having to open
the package. The agreement provides that opening the package or using
the software constitutes acceptance of the terms and conditions stated
therein. 95 Depending upon the applicable law, such an act may not
constitute acceptance.
92. Boston Store v. American Graphophone Co., 246 U.S. 8, 25 and 27, 38 S. Ct.
257, 261 (1918). The Court considered both liability for patent infringement and liability
for breach of contract, although it did not explain its rationale for finding no breach of
contract when, under the facts, the license agreement was clearly violated. Further support
for the proposition that one may not restrict transfer and use of property which has been
sold, aside from under the first sale doctrine of copyright law, can be found in antitrust
cases. See, e.g., Eastex Aviation, Inc. v. Sperry & Hutchinson Co., 522 F.2d 1299 (5th
Cir. 1975) (retention of title in license-sale transaction was merely formalistic and stamp
company actually divested itself of ownership of the stamps for antitrust purposes).
93. This type of breach of contract action would most likely be classified as protection
of one's trade secrets, a branch of unfair competition.
94. For more detailed discussion of 17 U.S.C. § 301 (1986 Supp.) see infra text
accompanying notes 127-28.
95. Some agreements provide that using the software constitutes acceptance. A few
software companies still provide that the license agreement must be signed and returned.
Of course, if the license is not signed and returned, the user's license is invalid, but the
manufacturer has no way to know of the user's purchase of the software unless the user
returns the license.
LOUISIANA LA W REVIEW
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1. Application of the U. C. C.
Four possible interpretations of the user's opening of the package
exist. Initially, it can be argued that the sale has already occurred, and
the seller is seeking to modify the sale contract by denying that it is a
completed sale. 96 This is easily envisioned in the mail order situation.
The user sees an advertisement for a type of software, calls the company
and places an order, or offer. The offer is accepted over the phone by
a promise to ship and arrangements for payment. 97 Hence, the transaction
objectively appears to be a sale of goods. 9s If that proposition is accepted,
then the license agreement is an attempt to modify an executory contract. 99
Under the U.C.C., "an agreement modifying a contract . . . needs
no consideration to be binding." ' 00 While the U.C.C. does not define
the term "modify," it may be considered' the introduction of new
elements or details which leave. the general purpose of the agreement
intact.' 0 1 This first interpretation may not require substantial analysis,
however, because of the low likelihood of a court finding that the license
agreement is merely an attempt to modify a contract for the sale of
goods. A statement in "modification" that the transaction is a license
to use and not a sale is more than a modification of an agreement;
the entire purpose and effect of the contract is altered.
A second interpretation of breaking the seal is that the license
agreement is an offer, and the opening of the package is an acceptance.
This is the construction mandated by both the Louisiana and Illinois
96. Peys, supra note 1, at 898-908.
97. Id. at 898-99. See also Einhorn, supra note 1, at 516-18. Both commentators
limit their analyses to the mail order situation which so neatly conforms to U.C.C.
analysis.
98. Peys, supra note 1, at 898-99, citing U.C.C. sect. 2-204 (1978). He also relies
upon U.C.C. § 2-206 (1978) and its Official Comment.
99. Peys, supra note 1, at 899:
The nature of the transaction invites acceptance from the retailer through a
promise to ship the software, quantity, payment terms or shipping arrangements
at the time of the retailer's acceptance. Thus, the contract terms consist of
those agreed upon, unless the consumer is informed of the forthcoming license
by the retailer. The software retailer's promise to ship or the actual shipment
of the software is a reasonable and conclusive act of acceptance. These two
provisions form the foundation whereby the oral expressions between the enduser and the retailer create an enforceable contract. (citations omitted).
100. U.C.C. § 2-209(1) (1978).
101. See Peys, supra note 1, at 900-01, 903-08. See also U.C.C. § 2-209, Official
Comment (1978) (the good faith test is to be applied to modifications); U.C.C. § 1-201(19)
(defining good faith); U.C.C. § 2-104(1) (1978) (defining merchant); U.C.C. § 2-103(l)(b)
(1978) (higher duty of good faith imposed upon merchants).
1987]
MASS MARKETED SOFTWARE
Software License Enforcement Acts. 102 Such an interpretation is consistent
with Article 2 of the U.C.C., because the user's act of opening the
package or using the software can be considered a reasonable manner
1
of acceptance. 03
If opening a package or using a software diskette is
a reasonable means of accepting under the circumstances, then the user
will have accepted the offer. Contracts under the U.C.C. and the common law which contain grossly unfair terms may be invalidated on
unconscionability grounds.' °4 A consumer-user is likely to raise this
argument. Further, under the U.C.C., the buyer has the right to make
reasonable inspection prior to acceptance, a right to which he is deprived
if the court views the license agreement as the offer and the opening
of the package as the acceptance.
Third, under the U.C.C., the sending of the software accompanied
by the license agreement may constitute a conditional acceptance of the
user's offer to purchase. Under common law, any variation from the
terms stated in the offer constitutes a counteroffer, not a valid acceptance. But Article 2 permits additional or different terms to be stated
in an acceptance. 05 The additional terms constitute proposals for addition
to the contract, although they may or may not become part of the
contract. °6 However, if the license agreement expressly makes the user's
102. Las. R.S. 51:1961-1966 (Supp. 1987); 29 Ill. Ann. Stat. ch. 29, para. 802-808
(Smith-Hurd 1987).
103. U.C.C. sect. 2-206(1) (1978). But see Einhorn, supra note 1, at 516, who argues
that the buyer has a right under U.C.C. § 2-606(1)(b) (1978) to inspect the goods prior
to acceptance and that such inspection is difficult without opening the package and using
the -software. However, the buyer may agree to waive his right to inspect under U.C.C.
§ 2-513(l) (1978). See, e.g., Cervitor Kitchens, Inc. v. Chapman, 7 Wash. App. 520, 500
P.2d 783 (1972). The Official Comment to 2-513 indicates that the software agreement's
provision would not constitute a waiver of the buyer's right to inspect: "[N]o agreement
by the parties can displace the entire right of inspection except where the contract is
simply for the sale of 'this thing.' Even in a sale of boxed goods 'as is' inspection is a
right of the buyer.
104. U.C.C. sect. 2-302(1) (1978) admits the common law doctrine of unconscionability
into commercial transactions governed by Article 2. The term "unconscionability" is not
defined in the Uniform Commercial Code. The Official Comment as well as the text of
the section make clear that the section is intended to allow the courts to directly assault
unfair contract provisions. In the past such policing has been accomplished by adverse
construction of language, by manipulation of the rules of offer and acceptance, or by
determinations that the clause is contrary to public policy or to the dominant purpose
of the contract. This section is intended to allow the court to pass directly on the
unconscionability of the contract or particulaf clause therein and to make a conclusion
of law as to its unconscionability. Official Comment to U.C.C. sect. 2-302(1). See generally,
Note, Frankly Incredible: Unconscionability in Computer Contracts, 4 Computer/L. J.
695 (1984), [hereinafter Unconscionability]. See also, Ellinghaus, In Defense of Unconscionability, 78 Yale L.J. 757 (1969) [hereinafter Ellinghaus]; Leff, Unconscionability and
the Code-The Emperor's New Clause, 115 U. Pa. L. Rev. 485 (1967) [hereinafter Left].
105. U.C.C. § 2-207(1) (1978).
106. U.C.C. § 2-206(2) (1978).
LOUISIANA LAW REVIEW
[Vol.48
assent to the additional terms a condition of its acceptance, the com0 7°
munication will not be deemed an acceptance.
In Baumgold Bros., Inc. v. Allan M. Fox Co., E.,10 the seller
enclosed a memo with the goods stating that the buyer's receipt constituted an acceptance of the risk of loss in shipment. The court held
that the seller's act of sending the goods indicated his willingness to go
forward with the sale even if the buyer did not assent to the additional
terms.' °9 The software licensing agreement, like the risk of loss provision
in Baumgold, accompanies the goods, but the shipment itself indicates
that the producer is willing to sell should the user reject the license
agreement.
The fourth interpretation is that the software manufacturer's advertisement is the offer, and the user's order is the acceptance. This
latter is the least likely interpretation, for under the U.C.C. an offer
exists only if there is an intent to be bound." 0
2. Common Law
A court not bound by the U.C.C. may apply common law to the
transaction. If the court views the license agreement as a modification
of a preexisting contract, the common law requires separate consideration."' Since the seller is not changing his obligation, the modification
would be invalid. The license agreement is not a valid acceptance, because
under common law the acceptance must be the mirror image of the
offer. Since it is not an acceptance, it is considered a counteroffer,
which terminates the original offer."12 The user's act of opening the
package or using the software would then complete the formation of a
contract." 3 Under common law the license agreement is subject to similar
scrutiny for unconscionability as it would receive under the U.C.C.
107.
U.C.C. § 2-207(1) (1978).
108. 375 F. Supp. 807 (N.D. Ohio 1973).
109. See also, Einhorn, supra note 1, at 517-18, discussing Baumgold.
110. U.C.C. § 2-204(1) and (3) (1978).
111. See, e.g., Brenner v. Little Red School House, Ltd., 59 N.C. App. 68, 295
S.E.2d 607 (Ct. App. 1982); Graham v. Jonnel Enter., Inc., 435 Pa. 396, 257 A.2d 256
(1969). But see, Restatement (Second) of Contracts § 89 (1981), indicating that a modification of an executory contract is binding if it is fair and equitable in light of surrounding
facts which were not anticipated by the parties when the contract was made, even though
no new consideration is given.
112. See, e.g., Zeller v. First Nat'l Bank & Trust Co., 79 Ill. App. 3d 170, 34 Ill.
Dec. 473, 398 N.E.2d 148 (Ct. App. 1979).
113. Einhorn believes this analysis is faulty because the user has already obtained all
the rights of a buyer prior to doing the act which constitutes acceptance of the license
agreement. Einhorn, supra note 1, at 513-14.
1987]
8MASS MARKETED SOFTWARE
3. Application of Louisiana Law
Louisiana's law is similar to the U.C.C. in classifying the shipment
1 4
of an order received from a buyer as the acceptance of the offer.1
However, the acceptance must conform to the terms of the offer." 5 If
it does not, it is considered a counteroffer." 6 Hence, in Louisiana the
shipping of the software to the user is a counteroffer.
It is also possible that a Louisiana court would find that the delivery
of the software to the user constitutes acceptance and that the additional
license agreement was an invalid attempt to put additional and materially
different terms in the agreement of the parties." 7 While once again the
court would be confronted with determining whether there was reasonable
assent to the proposed modification, failure to object to a modification
may constitute tacit acceptance of the terms." 8 No new consideration
is necessary to modify a contract under Louisiana law." 9 Consequently,
114. See, e.g., Boro Indus., Inc. v. James J. Culotta, Inc., 336 So. 2d 878 (La.
App. 4th Cir. 1976), writ denied, 339 So. 2d 24 (La. 1976) (shipment of order constituted
acceptance); McElroy Metal Mill, Inc. v. Hughes, 322 So. 2d 822 (La. App. 2d Cir.
1975) (delivery of order constitutes acceptance and seller cannot after performance argue
that seller and buyer never agreed to discount stated on buyer's order form); Cyrus W.
Scott Mfg. Co. v. Stoma, 10 La. App. 469, 121 So. 335 (Ct. App. 2d Cir. 1929) (order
for shipment of goods taken by salesman subject to approval of seller became contract
for sale by acceptance when the goods were shipped, even though the seller never communicated acceptance).
115. Litvinoff, Part II-Acceptance, supra note 64, at 194-99. See also Gulf South
Machinery, Inc. v. Kearney & Trecker Corp., 756 F.2d 377 (5th Cir. 1985), cert. denied,
106 S. Ct. 229 (1985) (order was offer, but seller's acknowledgement form was not
acceptance because it did not match the terms of the offer).
116. Litvinoff, Part lI-Acceptance, supra note 64, at 194-99.
117. See Baumgold Bros., Inc. v. Allan M. Fox Co., E., 375 F. Supp. 807 (N.D.
Ohio 1973).
118. See, e.g., Ceco Corp. v. Mid-Gulf Const., Inc., 396 So. 2d 474 (La. App. 4th
Cir. 1981) (buyer's failure to object to invoices reflecting exercise of escalation clause in
contract constituted acquiescence in modification); Stupp Corp. v. Con-Plex, Div. of U.S.
Indus., 344 So. 2d 394 (La. App. 1st Cir. 1977) (same); Bank of La. in New Orleans
v. Campbell, 329 So. 2d 235 (La. App. 4th Cir. 1976), writ denied, 332 So. 2d 866
(1976) (seller's tacit acquiescence in changed delivery term was a modification of the
contract). The courts relied on repealed La. Civ. Code art. 1811 (1870) which stated that
a contract can be assented to expressly or impliedly, and by action, inaction or silence.
Although the code article refers to the formation of contracts, the same rule should apply
to modifications of existing contracts. The present law on consent is contained in La.
Civ. Code art. 1927 which provides: "[O]ffer and acceptance may be made orally, in
writing, or by action or inaction that under the circumstances is clearly indicative of
consent." The new article does not purport to change the law.
119. Consideration in the common law sense is not required to form a contract in
Louisiana. The requirements for a valid contract in Louisiana are capacity, consent, a
lawful object of the contract, and a lawful cause. Cause is not the same as common law
consideration. See generally S. Litvinoff, The Law of Obligations in the Louisiana Jur-
LOUISIANA LA W REVIEW
[Vol.48
a valid licensing contract might seem to result from the user's acceptance
and use of the software.
Additionally, one Louisiana case has held that if the purchaser places
an order pursuant to a price list solicited from the seller, the order is
the act of acceptance.120 Common law is similar. Advertisements are
construed as offers only when they unequivocally state all necessary
terms and clearly indicate an objective intent to be bound.12'
There remains the recent Louisiana statute purporting to deal specifically with these license agreements. At first glance, the statute appears
to say simply that the user's act of opening the package is acceptance
of all the terms in the license agreement. However, the statute also
expressly states that it is not intended to change any law. Thus, the
statute may be inconsistent. As indicated, under Louisiana's Civil Code
the act of opening the package may not constitute acceptance of the
license agreement's provisions. Therefore, it is possible that the Louisiana
courts will use the general sales and obligations law, rather than use a
new statute that expressly defers to other law.
C. Prohibitions in the Agreement
A typical shrink wrap agreement prohibits a number of activities:
(1) transfer of the software or license, including rental and lending; (2)
copying for any purpose, although some permit the making of a backup
copy; (3) modifying the program; and (4) using the program on any
other CPU. 22 A fifth and more recent provision prohibits disassenbling
or reverse engineering the program.
These provisions are designed to provide software producers with
the means to protect against piracy. Unauthorized copying is believed
to be rampant, resulting in loss of revenues, which in turn keeps prices
high. 2 3 Rental houses are believed to be the source of most of the illicit
isprudence 87 (1985). See also La. Civ. Code art. 1967. Cause need be nothing more
than a reason why the buyer would consent to the modification. According to Professor
Litvinoff, modification of a contract is difficult under common law because of the necessity
for new consideration, yet the same modification would present less difficulty under
Louisiana law because all that is needed is cause for the modification (in addition to the
other requirements such as consent). 1 S. Litvinoff, Obligations § 284, in 6 Louisiana
Civil Law Treatise (1969).
120. Gulf South Mach., Inc. v. Kearney & Trecker Corp., 756 F.2d 377 (5th Cir.
1985), cert. denied, 106 S. Ct. 229 (1985); see Peys, supra note 1, at 884.
121. Lefkowitz v. Great Minneapolis Surplus Store, Inc., 251 Minn. 188, 86 N.W.2d
689 (Minn. 1957) (newspaper ad was sufficiently definite and manifested intent to be
bound by its own terms; acceptance invited by doing of prescribed act).
122. Stern, supra note 1, at 54-55.
123. Einhorn, supra note 1, at 510, citing Green, Sterne and Saidman, Mass-Marketed
Software, 10 BYTE 387 (February, 1985) (estimating between 1 and 20 "unauthorized"
copies per copy purchased from the publisher). See also Wilson, supra note 37, at 125.
1987l
MASS MARKETED SOFTWARE
copying. 2 4 However, the two known cases filed by a software producer
were against corporate users who made multiple copies for in-house use,
rather than for direct commercial gain.'21 Whether the copying is by
individuals lending to friends or by rental, the software producer, assuming he can enforce the prohibitions in the license agreement, has a
126
problem with detection.
1. Copyright
Prohibitions against copying, modifying, transferring and using the
127
program on other CPUs may be preempted by federal copyright law.
The courts have required a showing of two elements for preemption to
apply: (1) the work at issue must be within the subject matter of
copyright, and (2) the right being asserted under state law must be
124. Einhorn, supra note 1, at 510. See also Kane-Ritsch, supra note 36, at 285. For
videotape rental, the author says the reason for rental stores is that the cost of videotapes
is high. It is low compared to software. This writer believes that the major impetus for
videotape rental is that a person only wishes to view a movie once or twice and does
not want to own and store it. This is not true of computer programs, which by their
nature are intended for repeated use. See also Wilson, supra note 37, at 125 n.2.
125. Lotus Dev. Corp. v. Rixon, Inc., Civ. No. 84-278-C (D. Mass. Sept. 20, 1984)
(dismissed without prejudice), discussed in 2 Computer L. Rep. 1036 (May, 1984).
126. Einhorn, supra note 1, at 512-13.
127. 17 U.S.C. § 301 (1982). In addition to relying on the supremacy clause to preempt
equivalent state law, courts have been grappling with the 1976 Copyright Act's specific
provision dealing with preemption. Section 301 provides in relevant part:
... [AIII legal or equitable rights that are equivalent to any of the exclusive
rights within the general scope of copyright . . . and come within the subject
matter of copyright . . . are governed exclusively by this title.
(b) othing in this title annuls or limits any rights or remedies under the
common law or statutes of any State with respect to(1) subject matter that does not come within the subject matter of copyright ...
(3) activities violating legal or equitable rights that are not equivalent to any
of the exclusive rights within the general scope of copyright ...
17 U.S.C § 301(2), (b) (1982). The committee notes accompanying this statute indicate
that its primary purpose is to eradicate the dual system of copyright (common law and
federal) that developed under prior law. House Report, supra note 90, at 5745. However,
the legislature clearly intended for the statute to do more:
The intention of section 301 is to preempt and abolish any rights under the
common law or statutes of a State that are equivalent to copyright and that
extend to works coming within the scope of the Federal copyright law. The
declaration of this principle in section 301 is intended to be stated in the clearest
and most unequivocal language possible, so as to foreclose any conceivable
misinterpretation of its unqualified intention that Congress shall act preemptively,
and to avoid the development of any vague borderline areas between State and
Federal protection.
House Report, supra note 90, at 5746.
LOUISIANA LAW REVIEW
[Vol.48
equivalent to rights assertable under copyright law. 21 If both elements
are present, federal copyright law will preempt state law. The comment
to Section 301 of the Copyright Act 129 lists those areas which are not
preempted: privacy, trade secret, and breach of contract. A party asserting one of these must demonstrate that the claim has elements which
130
distinguish it from a cause of action for copyright infringement.
The Copyright Act enumerates both the copyright owner's exclusive
rights and the limitations on those rights.' Four limitations on the
copyright owner's exclusive rights may be applicable to the software
license situation: (1) the owner of a copy of a computer program may
make a copy of the program if "such new copy . . . is created as an
essential step in the utilization of the computer program in conjunction
with a
machine
.
. .
or .
. . such new
copy ...
is for archival purposes
only . . .,;12 (2) the owner of a copy of a computer program may
make an adaptation of the program if these same conditions are met;'"
(3) the owner of a copy may, "without authority of the copyright owner
1..,4
... sell or otherwise dispose of the possession of that copy .
128. See 17 U.S.C. § 301 (1982); Associated Film Distrib. Corp. v. Thornburgh, 614
F. Supp. 1100 (E.D. Pa. 1985); Mayer v. Josiah Wedgewood & Sons, Ltd., 601 F. Supp.
1523 (S.D.N.Y. 1985); Robert H. Jacobs, Inc. v. Westoaks Realtors, Inc., 205 Cal. Rptr.
620 (Cal. App. 1985); Suid v. Newsweek Magazine, 503 F. Supp. 146, 149 (D.D.C. 1980);
1 M. Nimmer, Nimmer on Copyright § 1.01 (B)(l), at 1-12 (1986).
129. 17 U.S.C. § 301 (1982).
130. See, e.g., Warrington Assoc., Inc. v. Real-Time Eng'g Sys., Inc., 522 F. Supp.
367 (N.D. Ill. 1981) ("plaintiff cannot merely rephrase the same claim citing contract law
and thereby obtain relief equivalent to that which he has failed to obtain under copyright
law"). See also. Smith v. Weinstein, 578 F. Supp. 1297, 1307 (S.D.N.Y. 1984), aff'd
mem., 738 F.2d 410 (2d Cir. 1984); Walker v. Time Life Films, Inc., 615 F. Supp. 430
(S.D.N.Y. 1985), aff'd, 784 F.2d 44 (2d Cir. 1986) (plaintiff allowed to lodge breach of
confidentiality and fiduciary duty claim); Mayer v. Josiah Wedgewood & Son , Ltd., 601
F. Supp. 1523 (S.D.N.Y. 1985) (describing "extra element" requirement to make a state
law claim distinct from copyright); Towle Mfg. Co. v. Godinger Silver Art Co., 612 F.
Supp. 986 (S.D.N.Y. 1985) (distinguishing the common law tort of palming off from
copyright infringement)..
131. 17 U.S.C. §§ 106-118 (1982 & Supp. I1 1985).
132. 17 U.S.C. § 117 (1982). Presumably the making of a copy under this section
permits the user to load a program into memory or onto another drive. It also presumably
permits the making of at least one backup copy (for archival purposes) in the event that
the original copy is damaged. See also Final Report of the National Commission on New
Technological Uses of Copyrighted Work, 38 (July 31, 1978) [hereinafter CONTU Report].
133. Id.
134. 17 U.S.C. § 109(a) (1982 & Supp. III 1986). This is the statutory embodiment
of the first sale doctrine. Congress clearly intends the privilege to extend only to owners
of copies. Subsection (d) provides:
The privileges prescribed . . . do not, unless authorized by the copyright owner,
extend to any person who has acquired possession of the copy . . . from the
copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership
of it.
1987]
MASS MARKETED SOFTWARE
and (4) "the fair use of a copyrighted work, including such use by
reproduction in copies ... for purposes such as criticism, comment,
news reporting, teaching ... scholarship, or research" is not an infringement.'
The first three limitations require that the software user be the
owner of the copy. As discussed in the preceding section of this paper,
whether the license will be treated as a sale for purposes of applying
both the Uniform Commercial Code and the federal copyright law is
unanswered, except possibly in the two states that have enacted software
license enforcement statutes.
a. Copying
The Copyright Act permits copying for archival purposes and copying
done in the process of using the computer. Producers take for granted
that a software user will make a temporary copy of the program by
loading it into the computer.' 3 6 The software license does not prohibit
this type of copying. The copying prohibited by the license is that done
for purposes other than backing up the software should the original
become damaged.
b. Adapting for Specific CPUs
The extent of the right to adapt a computer program for use on
a CPU is not yet clear. 3 7 The Copyright Act also provides that the
copyright owner has the exclusive right to create derivative works; 3 ' if
the adaptation is a derivative work, copyright law may allow the software
license's prohibition against modification of the program. An improved
version of a copyrighted computer program could not be marketed
without the permission of the owner of the copyright. This is the only
instance in which copyright law provides some protection to the un-
135. 17 U.S.C. § 107 (1982).
136. The- copy may still be sufficiently fixed to be entitled to copyright protection.
To be protected by copyright, a work must be fixed in a "tangible medium of expression."
17 U.S.C. § 102(a) (1982). See e.g., Apple Computer, Inc. v. Formula International, Inc.,
725 F.2d 521 (9th Cir. 1984) (copyrightability of operating system contained on ROMread only memory silicon chip); Apple Computer, Inc. v. Franklin Computer Corp., 714
F.2d 1240 (3d Cir. 1983), cert. dismissed, 464 U.S. 1033, 104 S. Ct. 690 (1984) (same);
Williams Elecs., Inc. v. Artic Int'l, Inc., 685 F.2d 870 (3d Cir. 1982) (images in audiovisual game fixed even though they change); Midway Mfg. Co. v. Artic Int'l, Inc., 547
F. Supp. 999 (N.D. I11. 1982), aff'd, 704 F.2d 1009 (7th Cir. 1982), cert. denied, 464
U.S. 823, 104 S. Ct. 90 (1983) (same).
137. 17 U.S.C. § 117 (1982). See generally Stern, Section 117 of the Copyright Act:
Charter of the Software Users' Rights or an Illusory Promise?, 7 W. New Eng. L. Rev.
459 (1985) [hereinafter Software Users' Rights].
138. 17 U.S.C. § 106(2) (1982). The term "adaptation" is not defined in the Copyright
Act. See Software Users Rights, supra note 139, at 461. A derivative work is one based
upon one or more preexisting works, consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship. 17 U.S.C. § 101 (Supp. 1986).
LOUISIANA LA W REVIEW
[Vol.48
derlying idea of the work.3 9 It appears from the plain language of the
statute that the right to adapt the program granted to the owner of the
copy extends no further than what is reasonably necessary to be able
to use the program on a certain CPU. Such adaptations may not be
4°
transferred without the consent of the copyright owner.'
c. Transferring and Renting
The first sale doctrine of copyright law permits the owner of a copy
to sell or otherwise dispose of possession of the copy.' 4' This is consistent
with the idea espoused by the Supreme Court in the licensing cases that
articles introduced into commerce through transactions resembling sales
cannot have ownership tentacles leading back to the patent or copyright
holder. 142 It has been argued that "otherwise dispose of 'possession' of
the copy" means any transfer of title, but does not include renting,
leasing or lending. 143 The legislative comments accompanying that section
of the Copyright Act, however, use as an example of the first sale
doctrine the case of a library which, owning a copy of the work, may
1
"lend it under any conditions it chooses to impose."'"
Even if the first
sale doctrine does permit the owner of a copy to rent, lease or lend it,
the comments make it clear that the first sale doctrine is not intended
to preempt other agreements to the contrary, specifically ones that place
conditions on further disposition of the copy. 45 Such comments support
the validity of the license agreement's prohibition against transfer, in
light of the software producer's need to protect against a rental for the
purpose of copying the programs.
139. 17 U.S.C. § 102(b) (1982). The legislative comments to section 102 mention this
concept in respect to computer programs. House Report, supra note 90 at 5670. Those
processes or methods may be protectable under state trade secret law, or, in rare cases,
under patent law. See e.g., Diamond v. Diehr, 450 U.S. 175, 101 S. Ct. 1048 (1981)
(finding patentable the utilization of a computer program to process synthetic rubber).
140. 17 U.S.C. § 117 (1982). "Adaptations [prepared in accordance with the provisions
of this section] may be transferred only with the authorization of the copyright owner."
If the section 117 "adaptation" is the same as a derivative work, section 117 merely
means that the owner of a copy may make a derivative work for a limited purpose,
without the consent of the copyright owner. The owner of a copy may not transfer the
work. Compare 17 U.S.C. § 103(b) (1982), discussing the ability to copyright a derivative
work.
141. 17 U.S.C. § 109(a) (1982). See Einhorn, supra note 1, at 519.
142. See supra note 68.
143. Colby, supra note 35, at 82-83. The author argues that rental industries in
videocassettes and phonorecords are not protected by copyright law's first sale doctrine.
The issue has not been litigated to date.
144. House Report, supra note 90, at 5693. The example used is not helpful because,
under other sections of the Copyright Act, libraries have special privileges such as special
rights to reproduce copies under section 108.
145. House Report, supra note 90, at 5693. The legislative comment indicates a clear
intent that section 109 not preempt state or general contract law.
19871
MASS MARKETED SOFTWARE
Commentators suggest a legislative solution to the problem of software rental and its unclear status under the first sale doctrine. 46 If the
provision in the license agreement is found to be binding as a contract,
the owner who rents out the copy would be liable for breach of contract.
The first sale doctrine does permit the owner of a copy to sell or give
away the copy; this transfer is also generally prohibited in the license
agreement. The unclear status of the producer's right to restrict subsequent transfers would seem to justify a legislative solution.
d. Fair Use
The final relevant provision of copyright law is the fair use doctrine,47
a judicially developed doctrine now codified in the Copyright Act.
Without defining fair use, the Copyright Act provides that fair use of
a copyrighted work is not infringement. The statute lists four factors
which must be considered in determining fair use: (1) purpose and
character of the use, (2) nature of the copyrighted work, (3) amount
copied and (4) effect on the value of or the market for the copyrighted
work. 148
The factors are not exclusive, 149 but courts considering fair use since
the passage of section 107 tend to emphasize only the listed factors. If
the copying is done for a commercial purpose, it is presumptively an
unfair use. 50 If, however, the copying is done for a non-commercial
purpose such as research, education, or personal use, the other factors
may be more heavily weighed. If copying of mass marketed software
were at issue, the entire program would be copied.
2. Trade Secret
Reverse engineering is "the process of examining and analyzing a
product to discover the process by which it was created."' 5 ' Reverse
engineering is generally done for the purpose of discovering what makes
the program work. Thereafter, it may be rebuilt or reassembled so that
the same or a similar display would appear on a computer screen, even
though the two programs are different.
Prohibitions against disassembling or decompiling theoretically have
nothing to do with copyright, because they do not involve copying or
146. Stern, supra note 1, at 63-65. Einhorn, supra note 1, at 523-24 (not as a proponent,
but merely in discussing a bill introduced to Congress); Wilson, supra note 37, at 141.
147. 17 U.S.C. § 107 (1982).
148. 17 U.S.C. § 107 (1982).
149. House Report, supra note 90, at 5678-80.
150. Harper & Row, Publishers, Inc. v. Nation Enterprises, 105 S. Ct. 2218, 2231
(1985); Sony Corp. v . Universal City Studios, Inc., 104 S. Ct. 744, 793 (1984).
151. Analogic Corp. v. Data Translations, Inc., 371 Mass. 643, 647-48, 358 N.E.2d
804, 807 (1976). See also Softright, supra note 26, at 1432.
LOUISIANA LAW REVIEW
[Vol.48
alienating a copy of a copyrighted work. Trade secret law protects both
the expression and the underlying idea, while copyright only protects
the expression.1 2 However, the possibility of overlap exists. In order to
prove there has been copying for copyright infringement purposes, the
courts, in the absence of an admission by the defendant, often rely on
the substantial similarity test, which requires a comparison of the two
works in question.' Under this test, the similarity in the result could
4
be considered copyright infringement.1
Prohibitions contained in shrink wrap agreements rely on trade secret
law, a branch of the common law of unfair competition.'
A new
Uniform Trade Secrets Act is being adopted by some states as an effort
to provide some predictability in the various state court interpretations
of the law. 6 The requirements for finding a protectible trade secret are
derived from the Restatement of Torts. The matter must be secret,
novel, and valuable.' 57 The latter two requirements are not a problem
for software producers. However, it is only by stretching the concept
that one can consider a mass marketed product as secret.' Additionally,
152. Einhorn, supra note 1, at 524-28. Restatement of Torts §§ 757-758 (1939). The
owner of a trade secret is not only protected from copying, but also from use of the
secret by anyone obtaining it wrongfully. See also Softright, supra note 26, at 1430-31.
153. See Whelan Assoc., Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3d
Cir. 1986); Broderbund Software, Inc. v. Unison World, Inc., 231 U.S.P.Q. (BNA) 700
(N.D. Cal. 1986).
154. Whelan, 797 F.2d at 1222; Broderbund, 231 U.S.P.Q. (BNA) at 700.
155. See generally, Solomon, The Copyrightability of Computer Software Containing
Trade Secrets, 63 Wash. U. L.Q. 131 (1985); Rimas, Trade Secret Protection for Computer
Software, 5 Computer/L. J. 77 (1984); Gilburne & Johnson, Trade Secret Protection for
Software Generally and in the Mass Market, 3 Computer/L. J. 211 (1982).
156. Uniform Trade Secrets Act, 14 U.L.A. 537 (West 1985) (adopted by the Commissioners on Uniform State Laws at their 1979 Annual Conference). See generally, Klitzke,
Uniform Trade Secrets Act, 64 Marq. L. Rev. 277 (1980). The Uniform Act has been
adopted by California, Colorado, Connecticut, Delaware, Indiana, Kansas, Louisiana,
Minnesota, Montana, North Dakota, Oklahoma, Rhode Island, Virginia, Washington,
West Virginia, and Wisconsin. In Louisiana, the statute is codified at La. R.S. 51:1431
(Supp. 1987).
157. Restatement of Torts § 757 comment b (1939). Uniform Trade Secrets Act §
1(4), 14 U.L.A. 537, 542 (1980).
The courts have found three elements relevant to finding a trade secret: (1) matter not
generally known or secret, (2) valuable, and (3) the owner attempts to keep the matter
secret. See Softright, supra note 26, at 1427.
158. The secrecy requirement is not strict. See, e.g., University Computing Co. v.
Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974) (restrictive use agreement with
joint venturer sufficient); Digital Devel. Corp. v. International Memory Sys., 185 U.S.P.Q.
(BNA) 136 (S.D. Cal. 1973) (legends on instruction manuals distributed to customers was
sufficient); Com-Share, Inc. v. Computer Complex, Inc., 338 F. Supp. 1229 (E.D. Mich.
1971), aff'd, 458 F.2d 1341 (6th Cir. 1972) (nondisclosure clause in agreement with another
company sufficient). However, the problem is that mass marketing permits increased
inspection of the matter, such that the secret is no longer secret. See Softright, supra
note 26, at 1430.
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reverse engineering may be considered a proper means of discovering a
trade secret. 1 9 Hence, even if the information contained in the software
was considered protectible trade secret material, the clause in the license
agreement prohibiting disassembly or decompiling may be in violation
of public policy. Stern stated the dilemma well:
Anti-disassembly clauses are sometimes justified on the theory
that the software proprietor wishes to retain trade secret status
for the underlying source code and to rely on copyright for the
object code actually marketed to the public. Although the software proprietor may so wish, that does not mean the wish
should be granted. Should an automobile manufacturer be permitted to sell cars with anti-disassembly clauses in order to
protect the trade secret status of the car's transmission? Is
software different? The secrecy of a mass-marketed product is
dubious at best. 6°
The probable primary source of computer program reverse engineering is the hardware manufacturer who desires to market a CPU
that is compatible with a more popular name brand model CPU.161
Rarely will the end user have the occasion or motive to reverse engineer
mass marketed software.
Wide distribution does not necessarily prevent trade secret protection.1 62 The distribution must, however, be accomplished in confidence.
Hence, the software producer attempts, through a contractual relationship with users, to maintain a confidential relationship. 63 The amount
of secrecy does not necessarily have to be great.1' For example, in the
workplace, a court will examine factors such as access of employees to
the secret information, security systems, and express agreements with
159. Stern, supra note 1, at 68.
160. Id.
161. Id. at 68-69. Copying a competitor's operating system program has been held to
be copyright infringement. See Apple Computer, Inc. v. Franklin, 714 F.2d 1240 (3d Cir.
1983), cert. dismissed, 464 U.S. 1033, 104 S. Ct. 690 (1984); Apple Computer, Inc. v.
Formula Intern., Inc., 725 F.2d 521 (9th Cir. 1984). More recently, the substantial similarity
test appears to have been expanded to include as copyright infringement works that have
been reverse engineered to discover "the secret" and then redesigned as improvements,
though no actual copying occurred. See supra note 153.
162. Data Gen. Corp. v. Digital Computer Controls, Inc., 357 A.2d 105, 114 (Ch.
Del. 1975).
163. Einhorn, supra note 1, at 526, citing Board of Trade v. Christie Grain & Stock
Co., 198 U.S. 236, 250-51 (1905) ("plaintiff does not lose its [secrecy] rights by communicating the results to persons, even if many, in confidential relations to itself, under
a contract not to make it public...").
164. Einhorn, supra note 1, at 526-27.
LOUISIANA LAW REVIEW
[Vol.48
employees. 65 If a violation is found, the remedy is usually the loss of
revenues for the amount of time it would have taken a competitor
independently to discover the secret, including by reverse engineering. 166
A user would infrequently desire the right to reverse engineer software,
since his primary purpose is not to discover the secret and market
competing software.
3. Limiting Use to One CPU
A final prohibition commonly found in software agreements is limiting the use of the program to one machine and one user. This prohibition may be relied upon to prevent both rental and personal lending.
It is, however, too restrictive if applied literally. Consider the following:
A computer lab at a learning institution purchases 25 CPU's and 25
software packages for the machines. The lab operator completes 25
license agreements, placing the serial number of a computer on each
license and signing each in his own name. The agreement is returned
to the vendor. 167 Under a strict application of the license agreement,
only the lab operator who signed the agreement may use the software
and each identical copy of the software may only be used on its proper
machine.
The software sales representative would be aware of the intended
use of the computers and attendant software. In fact, computer manufacturers compete for the educational market because they believe that
when the students graduate and purchase their own computers, they will
purchase that with which they are already familiar. If the lab operator
adheres to the promise in the license agreement, no student will be
permitted to use the computer's software. A growing number of software
producers resolve this problem by site licensing software, which gives
the user the right to make copies for use on a variety of CPUs by
more than one user.
D. Warranty Disclaimers and Remedy Limitations
Most software license agreements contain warranty disclaimers and
limitation of remedies clauses. Many of the agreements do provide
warranties regarding the merchantability of the disk itself with remedies
limited to repair or replacement of the damaged disk. No warranty
165. See Gilburne
in the Mass Market,
1432-33.
166. See Einhorn,
167. By returning
of software updates,
& Johnston, Trade Secret Protection for Software Generally and
3 Computer/L.J. 211, 230-32 (1982); Softright, supra note 26, at
supra note 1, at 527-28; Softright, supra note 26, at 1431.
the agreements, the lab operator insures that he will receive notice
and often the updates may be obtained at a discount.
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MASS MARKETED SOFTWARE
concerning the quality of the program contained on the disk is provided.
1 68
A software distributor may even disclaim warranty of title.
Conceivably, a software user could suffer substantial economic damage,169 but potentially even property damage and personal injury could
be sustained. 70 On the other hand, considering both the complexity of
programming procedure and the wide variety of uses made of any one
computer program, software producers cannot completely "debug" a
computer program.1 7' Further, software producers may not be able to
afford the cost of judgments that could be rendered against them were
they not to disclaim warranties. In that event, either they would be
unable to continue developing and producing new software, or they
would be forced to charge even higher prices for the software.
1. U.C.C. Provisions
While warranty protection accompanying commercial transactions,
including sales of goods, may have existed prior to the adoption of
Article 2 of the U.C.C., Article 2's explicit identification of three types
of warranties of quality and its guidelines on how to disclaim these
warranties has had a substantial impact on all types of commercial
transactions. 7 2 Most software producers use the prescriptions of Article
2 to disclaim warranty protection and to limit available remedies in the
license agreement. This is partly because the common law does not
provide the software producer clear guidelines for avoiding liability based
on defective programs. As a consequence, Article 2 warranty analysis
serves by analogy in a wide variety of commercial transactions.
Article 2 describes three warranties of quality: express, implied fitness
for a particular purpose, and implied merchantability. 73 First, license
168. Hence the software user would be liable to a third party who claims the program
was stolen from the third party, the ideas in the program were protected by trade secret
law, or the third person's copyright was infringed. See U.C.C. § 2-312(3) (1978).
169. See Software Error, supra note 26, discussing a suit filed by a Florida construction
company against a software producer, alleging that one of its software programs caused
plaintiff to underbid on a job.
170. See Schneider, supra note 54, at 533 and n.9. Distinguishing between economic
and property damage is difficult, but important because courts generally do not recognize
strict liability for defective products when the only injury suffered is economic. See Razook,
The Ultimate Purchaser's and Remote Seller's Guide Through the Code Defenses in Product
Economic Loss Cases, 23 Am. Bus. L.J. 85, 87 and n.14 (1985).
171. See Schneider, supra note 54, at 533, citing Gemignani, Product Liability and
Software, 8 Rutgers Computer & Tech. L.J. 173, 183-84 (1981).
172. See Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial
Code, 39 Fordham L. Rev. 447 (1971), and Farnsworth, Implied Warranties of Quality
in Non-Sales Cases, 57 Colum. L. Rev. 653 (1957).
173. An express warranty, generally created during the negotiation phase prior to the
contract for sale, is simply created by an affirmation of fact or promise by the seller, a
LOUISIANA LA W REVIEW
[V61.48
agreements not only contain disclaimers of express warranties, but often
contain an integration clause stating that the license contains the entire
agreement of the parties. This has the effect of precluding proof of any
express warranties not contained in the license.
Second, the Warranty of fitness for a particular purpose'7 4 may be
disclaimed by language such as "no warranties extend beyond the description on the face hereof,""' as long as the general disclaimer is in
76
writing and is conspicuous.
Third, an implied warranty of merchantability, unless disclaimed,
accompanies any sale in which the seller is a merchant. 177 "Merchantable"
means the goods conform to the contract description and are fit for
their ordinary purposes. 78 Many warranty claims involve the warranty
of merchantability for two reasons: (a) the warranty applies to all latent
defects in a product which cause a malfunciion, and (b) it is implied
in every sale by a merchant, unless disclaimed. To disclaim the warranty
of merchantability, the language must mention merchantability, though
the disclaimer need not be in writing. If it is in writing; it must be
conspicuous. 79 All implied warranties may be disclaimed with the language "as is"or "with all faults."' 80
In addition to disclaiming all warranties, most license agreements
also limit remedies and damages, a practice permitted under Article 2.'1'
If, however, warranties have been disclaimed, then there is no need to
limit remedies and damages for breach of warranty, since there will be
no action for breach of warranty available to the injured user.1 2
description of the goods, or a sample, any of which must become part of the basis of
the bargain. See U.C.C. § 2-313 (1978). For instance, a statement in a software producer's
advertisement describing the capabilities of the program may create an express warranty.
All express warranties created prior to entering into the contract may be disclaimed in
the contract simply by stating that all express warranties are disclaimed. See U.C.C. §
2-316(1) (1978). The parol evidence rule prohibits irtroducing evidence of prior agreements
or promises that contradict any terms in the contract. U.C.C. § 2-202 (1978).
174. An implied warranty of fitness for a particular purpose is created when the seller
has reason to know of the buyer's particular needs and that the buyer is relying on the
seller's skill in providing suitable goods. The seller at that point warrants that the goods
are fit for that purpose. U.C.C. § 2-315 (1978).
175.
U.C.C. § 2-316(2) (1978).
176.
177.
178.
Id.
U.C.C. § 2-104(1) (1978).
U.C.C. § 2-314(2) (1978).
179. U.C.C. § 2-316(2) (1978).
180. U.C.C. § 2-316(3)(a) (1978). See also U.C.C. § 2-316(3)(b) & (c) (1978) (when
the buyer has fully examined the goods or has refused to examine them, there is no
warranty as to defects an examination ought to have revealed to him; implied warranties
can be excluded or modified by course of dealing or trade usage).
181. U.C.C. §§ 2-718 and 2-719 (1978) permit limitations of remedies and damages.
182. U.C.C. § 2-316(4) and Official Comment 2 (1978). Comment 2 states: "[11f no
19871
MASS MARKETED SOFTWARE
Among other provisions, Article 2 permits "limiting the buyer's
remedies to return of the goods and repayment of the price or to repair
and replacement of non-conforming goods or parts."' 3 The stated remedy is considered optional unless the agreement provides that it is the
exclusive remedy of the buyer.'8 4 Most license agreements provide that
remedies are exclusively limited to repair or replacement of a damaged
or defective disk.
Additionally, the buyer's consequential damages may be excluded.' 85
These are typically of two types: (a) damages resulting from seller's
breach which were foreseeable by the seller at the time of contracting,
and (b) personal or property injury resulting from seller's breach of
warranty.8 6 Article 2, however, incorporates restrictions that may be
imposed on the seller in regards to both limiting remedies and disclaiming
warranties. For example, "'w]iere circumstances cause an exclusive or
limited remedy to fail of its essential purpose, remedy may be had as
provided in [Article 2]." 1 The idea is to preserve for the aggrieved
party "some fair quantum of remedy' ' 8
An exclusion is permitted unless it is unconscionable. "Limitation
of consequential damages for injury to the person in the case of consumer
goods is prima facie unconscionable but limitations of damages where
the loss is commercial is not.' ' 8 9 Mass marketed software often can be
used for both consumer and commercial activities. The effect of the
clause in the license agreement depends on who the injured user is and
warranty exists, there is of course no problem of limiting remedies for breach of warranty
.... " Software producers take advantage of the opportunity for overlapping protection
and provide both disclaimers of warranty and disclaimers of remedies for. breach of
warranty.
183. U.C.C. § 2-719(I)(a) (1978).
184. U.C.C. § 2-719(l)(b) (1978).
185. U.C.C. § 2-719(3) (1978).
186. U.C.C. §§ 2-715(2)(a) & (b) (1978). Subsection (b) presumably includes economic
loss as injury. Official Comment 3 states as regards subsection (a): "Particular needs of
the buyer must generally be made known to the seller while general needs must rarely
be made known to charge the seller with knowledge." The producer knows the general
purposes to which the user will put the software and is probably also aware that, in the
event of defective software, the user may suffer business or economic injury.
187. U.C.C. § 2-719(2) (1978). See Wilson Trading Corp. v. David Ferguson, Ltd.,
23 N.Y.2d 398, 244 N.E.2d 685, 297 N.Y.S.2d 108 (Ct. App. 1968) (sales contract provided
that claims relating to shade, quality or other aspects of yarn could not be lodged against
the seller more than 10 days after receipt of the shipment, or after weaving, knitting, or
processing of the yarn; provision would not be applied when the buyer could not reasonably
have discovered defects within the stipulated time because of a failure of its essential
purpose).
188. U.C.C. § 2-719 Official Comment 1 (1978).
189. U.C.C. § 2-719(3) (1978). Consumer goods are those "used or bought for use
primarily for personal, family or household purposes." U.C.C. § 9-109(1) (1978).
LOUISIANA LAW REVIEW
[Vol.48
the type of injury incurred, in spite of the fact that the same agreement
is imposed on all users. Article 2's distinction between consumer goods
and commercial goods is unfortunate in the software context because
both users purchase the software with the same expectations.
Some states provide restrictions on warranty disclaimers and remedy
limitations beyond those provided in Article 2.190 Most of the restrictions
apply only to consumer goods; since the majority of software uses are
commercial, generally the additional protections would not apply.
Any contract or part thereof that was unconscionable at the time
the contract was made may be avoided or limited. 91 Courts have had
ample opportunity to consider the unconscionability issue as regards
contracts for installation of computer systems. In most cases, unless a
court found some other infirmity in the contract, the courts have not
92
found the warranty disclaimers and remedy limitations unconscionable.
While the cases may be helpful in tracking the development, or lack
thereof, of the unconscionability doctrine, they have little bearing on
mass marketed software purchases due to the differences in contracting
procedures. In the computer system situation, the seller's agent deals
personally with the buyer, fashioning a system for the buyer's particular
needs. On the other hand, in the software license situation, the contract
190. Schneider, supra note 54, at 542-44. Of the eleven state warranty laws discussed
by the writer, six prohibit disclaimers of the implied warranty of merchantability as regards
consumer goods and one eliminates § 2-316 from the U.C.C.
191. U.C.C. § 2-302(1) (1978). See generally Corbin on Contracts §§ 559A-I, at 56588 (C. Kaufman Supp. 1984); Ellinghaus, supra note 104, at 757; Kornhauser, Unconscionability in Standard Forms, 64 Calif. L. Rev. 1151 (1976); Leff, supra note 104, at
485; Leff, Contract As Thing, 19 Am. U. L. Rev. 131 (1970); Murray, Unconscionability:
Unconscionability, 31 U. Pitt. L. Rev. 1 (1969); Spanogle, Analyzing Unconscionability
Problems, 117 U. Pa. L. Rev. 931 (1969); White & Summers, Uniform Commercial Code
147 (2d ed. 1980); Zammit, Contracting for Computer Products-Part III, 54 N.Y.S.B.J.
294 (1982); Note, Unconscionability and the Fundamental Breach Doctrine in Computer
Contracts, 57 Notre Dame L. Rev. 547 (1982).
192. See Unconscionability, supra note 104. Some 50 cases are cited by the author,
all of which involve plaintiffs suing computer system specialists for defective computer
systems. In some of the cases the courts found fraud, but in most instances the courts
relied on U.C.C. § 2-316 to allow the warranty disclaimers utilized by the specialists to
prevent recovery for the harm caused by the defective systems. Courts rarely find unconscionability without finding some other infirmity. See, e.g., Burroughs Corp. v. Chesapeake Petroleum & Supply Co., 282 Md. 406, 384 A.2d 734 (Ct. App. 1978) (trial court
found that a limitation of damages clause on reverse side of contract was not part of
the contract and in the alternative the clause was unconscionable). See also Zammit,
Contracting for Computer Products, N.Y.S.B.J. 294, 294-96 (1982) (acknowledging that
the argument for finding unconscionability in computer contracts is attractive since many
computer purchasers are unsophisticated in computer expertise, but countering that most
such purchasers are businessmen who, while they may be inept as regards computers, are
not wholly unfamiliar with the contractual allocation of risk involved in a warranty
disclaimer).
1987]
MASS MARKETED SOFTWARE
123
consists of the order and the shipment of the software, or of the request
to the retailer for a certain type of software.
In summary, Article 2 permits warranty disclaimers and limitations
of remedies and damages, and software license agreements utilize these
formulas. Even though the word of the U.C.C. has been obeyed, however, a higher voice may speak to alleviate any "oppression and unfair
surprise"' 193 resulting from the terms of the license agreement.
2. Louisiana Provisions
Under the Louisiana Civil Code, the seller warrants that the thing
sold is free of redhibitory vices. 194 "Redhibition is the avoidance of a
sale on account of some vice or defect in the thing sold, which renders
it either absolutely useless, or its use so inconvenient and imperfect,
that it must be supposed that the buyer would not have purchased it,
had he known of the vice."' 9 The defect must be latent, i.e., not
discoverable by the buyer upon simple inspection, 9 6 and must not have
been revealed by the seller before or at the time of sale. 197
The warranty can be disclaimed, but the validity of the disclaimer
is subject to stringent judicially incorporated requirements. Louisiana
courts have held that the implied warranty against redhibitory defects
may be disclaimed only if (1) the disclaimer is written in clear and
unambiguous terms, (2) the disclaimer is contained in the sale document,
and (3) the disclaimer is brought to the attention of the buyer or
explained to him. 19s Warranty disclaimers in software licenses that satisfy
193. U.C.C. § 2-302 Official Comment 1 (1978).
194. La. Civ. Code art. 2475. However, the remedy for breach of this warranty may
be more limited than the remedies for breach of warranty under the U.C.C. If the seller
was unaware of the defect, he is afforded an opportunity to repair, and if he cannot
repair, then he must return the purchase price with incidental damages. La. Civ. Code
art. 2531. In turn, the seller has the same right against the manufacturer. A seller who
knew of the defect is additionally liable for damages and attorney fees. La. Civ. Code
art. 2545. The result may be otherwise if the buyer is suing the manufacturer because,
under Louisiana law, the manufacturer is presumed to know of defects in the product
which it manufactures. Therefore, the manufacturer is presumed to be in bad faith and
is liable for damages and attorney's fees if the warranty is breached. See Hersbergen,
Unconscionability: The Approach of the Louisiana Civil Code, 43 La. L. Rev. 1315,
1354-58 (1983).
195. La. Civ. Code art. 2520.
196. La. Civ. Code art. 2521.
197. La. Civ. Code art. 2522.
198. See Prince v. Paretti Pontiac Co., Inc., 281 So. 2d 112 (La. 1973); Theriot v.
Commercial Union Ins. Co., 478 So. 2d 741 (La. App. 3d Cir. 1985); Jeansonne v. Leon
Pickard Chevrolet, 447 So. 2d 551 (La. App. 1st Cir. 1984); General Motors Acceptance
Corp. v. Johnson, 426 So. 2d 691 (La. App. Ist Cir. 1982), writ denied, 433 So. 2d 151
LOUISIANA LA W REVIEW
[Vol.48
the U.C.C. would not meet Louisiana's requirements for at least three
reasons. First, the disclaimer is not contained in the sale document, but
is attached to the product. Second, the license's disclaimer does not
mention redhibitory vices and may, therefore, fail the "clear and unambiguous" test. Third, the disclaimer is not brought to the software
user's attention or explained to him prior to the purported time it
becomes effective.
Perhaps other provisions in the software license would also be invalid
under Louisiana law. Although Louisiana does not have a doctrine of
unconscionability per se, Louisiana courts consider vices of consent
(error, fraud, and duress) when interpreting contracts to overcome unfair
results in an adhesionary situation, in much the same manner that other
jurisdictions apply Article 2's unconscionability doctrine. 199
The Louisiana Civil Code articles on error provide that error will
vitiate consent. 2 0 Recently, in a breach of warranty case, Jeansonne v.
Leon Pickard Chevrolet,20 1 the court gave a succinct description of the
error that vitiates consent:
The Louisiana Civil Code recognizes that in order to have a
valid contract there must be consent by the parties ....
Error
as to fact can vitiate this consent .... There is an error as to
fact when one is ignorant of a fact which exists or believes in
the existence of a fact which does not exist ....
It is not every
error of fact that will invalidate a contract. Only those concerning a principal cause for making the contract, (either as to
the motive for making the contract, as to the person with whom
it is made, or as to the subject matter of the contract) will
invalidate it ....
An error as to the cause of a contract must
relate to the principal cause, which is defined as ". . . the motive,
and means that consideration without which the contract would
not have been made ...
"202
(La. 1983).
See also, Hersbergen, supra note 194, at 1363: "[A]n enforceable renunciation of implied
warranty is infrequent in a commercial transaction in Louisiana and, in fact, rare in a
noncommercial (or 'consumer') transaction."
199. Hersbergen mentions that in Louisiana the judicial use of these doctrines appears
to be sufficient such that no new doctrine such as unconscionability is necessary to achieve
just results. Hersbergen, supra note 194, at 1428-29.
200. La. Civ. Code arts. 1949, 1950.
201. 447 So. 2d 551 (La. App. 1st Cir. 1984).
202. Id. at 553. See also, Hersbergen, supra note 194, at 1323. Error as to cause
includes the nature of the contract, the object of the contract, a substantial quality of
the object, a person, law, or any other cause. La. Civ. Code art. 1950. The error must
go to the principal cause of the contract, and the cause must be known as such to the
other party. Note that article 1949 now reads: "Error vitiates consent only when it
19871
MASS MARKETED SOFTWARE
If consent was obtained by error, it is invalid. While similar to the
common law's doctrine of mistake, error in Louisiana appears to apply
more broadly than does mistake in common law.2" 3 The software license
agreement gives rise to error as to the cause of the contract, since the
user's "cause" was to obtain ownership of the software, when in fact
the license provides for no transfer of ownership.
Second, it is not as difficult to make a case for fraud in Louisiana
as it is at common law. 2° "Fraud is a misrepresentation or a suppression
of the truth made with the intention either to obtain an unjust advantage
for one party or to cause a loss or inconvenience to the other. Fraud
may also result from silence or inaction." ' 05 Louisiana courts recognize
an "inference of fraud ... from the presence of 'highly suspicious'
circumstances. ' 206 However, it is difficult to imagine a court avoiding
the terms of a software license agreement on the basis of fraud as
defined by the code. Although the consequences of opening the software
concerns a cause without which the obligation would not have been incurred and that
cause was known or should have been known to the other party." However, the comments
to aiticle 1949 state that the new article does not change the law. See' also, Hersbergen,
supra note 194, at 1323.
203. For instance, see Hersbergen, supra note 194, at 1324: "A business person in
Louisiana, as an expert in his trade ... must be diligent to spot any potential misunderstandings and make such disclosures as will avoid the same." Hersbergen notes that
the "common law likewise regards error or mistake as a defect of consent." But "one
may conclude that common law principles of mistake were inadequate tools with which
to achieve just results in contract disputes." Id. at 1323.
The author goes on to discuss how Williams v. Walker-Thomas Furniture Co., 350
F.2d 445 (D.C. Cir. 1965), would have been decided had it arisen in Louisiana. In that
case, the court invalidated a clause in a credit sale providing that in the event of a default
in payment all property formerly purchased by the buyer from the seller would be subject
to repossession.
It is quite possible that the buyer's consent in Williams was produced by
error. A principal cause of each of the contracts was, at the very least, the
acquisition of ownership of the various items Mrs. Williams acquired from
Walker-Thomas over the years; what she obtained in fact was temporary use
of those items, indistinguishable from the use enjoyed by a mere lessee.
Hersbergen, supra note 194, at 1328.
204. Hersbergen believes that "the failure of fraud to have evolved as a common law
protective principle also may have played a role in the development of unconscionability."
He credits the difference in this development between civil and common law on the
common law's caveat emptor doctrine. Hersbergen, supra note 194, at 1329. See infra
note 206.
205. La. Civ. Code art. 1953 Further, the error caused by fraud need not relate to
the cause of the contract, but must merely be material. La. Civ. Code art. 1955; see
also Hersbergen, supra note 194, at 1330.
206. Hersbergen, supra note 194, at 1337 and n.104, citing La. Civ. Code art. 1848
(1870). Article 1848 was replaced by La. Civ. Code art. 1957, which sets the standard
of proof at a preponderance of the evidence, which could be established circumstantially.
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package are not generally conceivable by the layman, even if he has
read the agreement, no truths are withheld.
Third, Louisiana has the equivalent of the fundamental breach doctrine which is widely recognized in Britain and Canada.2 0 7 If the seller
does not deliver what the contract specified, disclaimers of warranty are
futile because the court characterizes such as nonperformance. 20 1
It must be emphasized that the U.C.C. definition of consumer goods
focuses on the use to which the goods are to be put, 2°9 whereas Louisiana
emphasizes the nature of the purchaser.2 10 By way of illustration, the
Louisiana Supreme Court in Louisiana Nat'l Leasing Corp. v. ADF
Serv., Inc., stated: "Safeguards protecting consumers must be more
stringent than those protecting businessmen competing in the marketplace
.... It must be presumed that persons engaged in business ... were
aware of the contents of the . . . agreement which they signed." ' 2" The
problem with Louisiana's approach is that the lines of the distinction
between consumer and merchant/businessman are not clear. Many business persons purchase mass marketed software for their businesses, and
it is often the same software purchased by individuals for personal or
family use. For purposes of finding fair results in the software license
situation, the better approach was intimated by Leff 2 2 when he argued
for classification of adhesion contracts as things to be regulated by
legislation rather than by judicial doctrines based on contracting procedures.
213
207. See Fundamental Breach, supra note 191, at 551-52. The author believes that the
concept of "fundamental obligation" is the same as the U.C.C.'s "essential purpose."
Hence, the law of sales should already have the equivalent of a fundamental purpose
doctrine. Its effect is to preclude disclaimers of warranty that go to the very essence of
the contract.
208. Hersbergen, supra note 194, at 1349-53. Hersbergen warns, however, that it is
difficult to distinguish between breach of warranty of quality and breach of contract for
failure to deliver what was promised.
209. U.C.C. § 9-109(1) (1978) defines consumer goods as ones "used or bought for
use primarily for personal, family, or household purposes." The comment indicates that
in cases of dual use, "the principal use to which the property is put should be considered
as determinative." Id., Official Comment 2.
210. Hersbergen, supra note 194, at 1366.
211. 377 So. 2d 92, 96 (La. 1979).
212. Contract as Thing, supra note 191, at 156.
213. See Fundamental Breach, supra note 191, at 551. In analyzing computer contracts,
to be distinguished from software licenses, the writer indicates that findings of unconscionability in contracts depend on whether the courts focus on the buyer as a sophisticated
businessman or as a person with computer sophistication. Yet the prevailing view is that
businessmen are familiar with the effect of exculpatory clauses in contracts, so it should
not matter how much expertise the business purchaser possesses as regards the subject
matter of the contract. See, e.g., Bakal v. Burroughs Corp., 74 Misc. 2d 202, 343 N.Y.S.2d
541 (Sup. Ct. 1972). Kornhauser, supra note 191, at 1183, also suggests a legislative
1987]
MASS MARKETED SOFTWARE
III. CONCLUSION
Computer software is mass marketed by the use of license agreements
which generally provide that (1) opening the package constitutes acceptance to the terms; (2) the transaction is a limited license for use
rather than a sale; (3) the software user is not permitted to copy,
modify, transfer, or use the software on other computers; and (4)
warranty protection is absent and remedies are limited to repair or
replacement of damaged disks with no rights in the user should the
software malfunction and cause damage to the user, his property, or
business.
These license agreements are wholly favorable to the software producer and largely unreasonable from the software user's standpoint.
Various rationales are utilized by the producer to justify the provisions,
such as prevention of software piracy, prevention of unauthorized copying or rental, inability to completely debug programs, and inability to
bear the economic risk of lawsuits. Software users, on the other hand,
rarely understand that they are paying for a limited right to use a
program that may not function.
The primary provision which affects the rights and interests of the
parties states that the producer retains title and that the consumer is
granted a license to use the program subject to the limitations set forth
in the Agreement. Whether the transaction is a license, rather than a
sale, defines whether the U.C.C. on sale of goods and the copyright
law will apply to the transaction. Such a determination effects the
enforceability of restrictions on copying, transferring, modifying, and
using the program. Regardless of the classification of the transaction,
however, the enforceability of the restrictions imposed by the agreement
depends upon whether opening the package or using the software constitutes acceptance of those terms and conditions. Additionally, the
warranty disclaimers and limitation of remedies clauses may be vulnerable
to invalidation as unconscionable.
Although the legality of software licensing agreements has been
questioned, legislation in two states supports the software producers'
license agreements, and similar statutes are being contemplated by other
solution to the standard form contract problem, primarily due to the fact that even
unconscionability analysis does not lend itself to the situation. He notices that there is
an "almost exclusive application of the unconscionability doctrine to consumer transactions
....
" Id. at 1161. The reason is, he believes, that the courts still have to focus on the
procedural aspects of the contracting process, while in standard forms there is no contracting process; the adhesion contract is just another "thing" bought along with the
product. Id. at 1180. The license agreement at issue herein may not rise to the level of
an adhesion contract; the original problem, requiring that consent be manifested by opening
a package, falls short of the generally contemplated signing of the form by the nonauthor party.
128
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states. In some instances this legislation further blurs the issues by
providing that laws contrary to the software license provisions must be
followed. This article has advocated some balancing of interests and has
suggested some viable legal analyses available to courts which desire to
reach a fair result in the event of a lawsuit.